As new regulatory standards take effect, audit committees formalize assessments of their external auditors

May 2017

A fundamental responsibility of an audit committee is to oversee and evaluate the performance of the external auditor. Policymakers and investors are seeking more disclosure from audit committees about auditor performance. Regular evaluations of the auditor both satisfy these external stakeholders and provide an audit committee with additional comfort about audit quality.

On 19-20 April 2017, members of the European Audit Committee Leadership Network (EACLN) met in Paris for their 28th stand-alone meeting. As part of that meeting, members participated in a two-part conversation about external auditor evaluations. In the first part of the session, Jean-Yves Jégourel, EY’s EMEIA Assurance leader, briefed members on significant regulatory developments and recommended that audit chairs formalize assessment processes. Then, in an executive session, audit committee chairs shared their views on evaluating external auditors and on the practices they use to ensure that their companies receive high-quality audits from teams that are skilled, transparent and candid.

In conversations before, during and after the meeting, guests and members considered the following topics: 

  • Will EU audit regulation increase pressure for enhanced assessment of external auditors?
    Experts forecast increased attention to external auditor assessments, even though the European Commission does not formally require such auditor evaluations.  Recent reforms have focused on the audit committee’s duty of care, on disclosing interactions between the external auditor and the audit committee and on mandatory auditor rotation.  This indirect regulatory pressure, and the potential for a more direct requirement in the future, is causing audit committees to consider enhancing their current auditor assessment process.  

  • What do audit committees look for when assessing the performance of their auditors?
    EACLN members emphasized that strong relationships are crucial to a successful audit.  Audit chairs value auditors who demonstrate their independence from management by communicating openly and candidly with directors about issues.  Productive interaction between the audit committee, the audit firm, and management sends strong signals about the effectiveness of the audit team; an effective lead partner is able to maintain both a critical eye and strong relationships across the organization.  Assessing the auditor’s performance when the company has global operations poses a particular challenge for audit chairs, requiring heightened attention to audit activities in regions of concentrated risk.

  • What processes do audit committees use to test and track performance?
    Audit committees continuously evaluate their external auditors over the course of an engagement, sometimes using informal techniques to assess performance.  Many EACLN members also employ more formal tools – including surveys and interviews with directors and members of management – to quantify and track the auditor’s performance.  Audit committees are also interested in inspection reports issued by national regulators, the audit firms’ own audit quality assessments and other material to help benchmark the performance of their audit engagement teams.