European Audit Committee Leadership Network, October 2019
The frequency of audit tenders has increased in recent years, primarily in response to the European Union’s (EU) Audit Regulation and Directive (ARD), which requires many companies to put audits out for tender once the incumbent auditor has served for 10 years. While the ARD allows a company to extend the incumbent auditor’s engagement in certain circumstances, a substantial number of companies have rotated auditors in the brief period since the ARD became effective.
When audit committees conduct tenders, they evaluate the quality of the audit firm and the individuals who will conduct the audit, as they do when they evaluate an incumbent external auditor. Yet tenders are more complex and time consuming for the audit committee, demand more engagement from management, and involve additional evaluation criteria.
On 13 September 2019, members of the European Audit Committee Leadership Network (EACLN) met in Munich to discuss their experiences with the tender process.2 This ViewPoints shares background information and member perspectives on the following issues:
- Selection criteria
Audit committees differentiate between audit firms by evaluating a range of criteria. In some cases, technology is a key differentiator. Audit committees also assign considerable weight to the qualifications and capabilities of the proposed audit team; not just the lead partner but also those who will serve as additional points of contact for the audit committee and management. Audit committees look for fees that accurately reflect the likely scope of the audit and the cost of the engagement.
- The tender process and the roles of the audit committee and management
The tender process begins for the audit committee when it recommends to the full board that the company initiate a tender. The audit committee has authority over the process, utilizing management to craft the request for proposal (RFP) and the evaluation criteria. Management supplies the firms with data they can use to draft their bids. The audit committee and key members of management meet with auditor partners and their teams. The audit committee then recommends two top choices to the full board.