Audit chairs share effective strategies for evaluating the external auditor

May 2017

One of the fundamental responsibilities of an audit committee is to oversee and evaluate the performance of the external auditor. Audit committees utilize a range of techniques to ensure that their companies receive high-quality audits from teams that are skilled, transparent, and candid. As policymakers and investors seek more disclosure from audit committees about auditor performance, regular evaluations of the auditor can both satisfy external stakeholders and provide additional comfort about audit quality. 

On March 31, 2017, members of the Audit Committee Leadership Network (ACLN) met in New York to share practices to assess the performance of the external auditor. This ViewPoints includes background information and synthesizes the perspectives that members shared before and during the meeting on the following topics: 

  • What do audit chairs look for when assessing the performance of the external auditor?
    ACLN 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.  Interaction among the board, 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. One particular challenge that ACLN members identified is the difficulty of assessing the auditor’s performance on a global level, and the lead partner’s oversight of the audit teams in risky jurisdictions. 

  • How do audit chairs test and track performance?
    Audit committees continuously evaluate their external auditors over the course of the engagement, sometimes using informal techniques to assess performance. In addition, many ACLN members employ more formal tools – including surveys of and interviews with directors and members of management – to quantify and track the auditor’s performance at the engagement level. Audit committees are also interested in Public Company Accounting Oversight Board (PCAOB) inspection reports, the firms’ own audit quality assessments, and other material to help benchmark the performance of their audit engagement teams. In a number of cases, audit committees have enhanced their proxy disclosures to provide additional information about their auditor assessment process.