Companies on both sides of the Atlantic are seeing their relationships with external audit firms more strictly regulated. In this scenario, could audit committees reduce the perceived need for regulatory action by taking a more formal approach to the evaluation of auditor performance?

Most audit committees already review their external audit firm work and are adamant that, faced with a trade-off between fees and quality, their priority is always the latter. Faced with the prospect of a fee reduction, they steer a course towards more efficiencies, process improvements or scope changes on both sides, rather than jeopardise audit quality.

But policy-makers in both Europe and the US are looking at tougher regulations that – as they see it – are needed to enhance independence and encourage greater auditor scrutiny of management decisions. The subtext is that audit committees are not doing enough to ensure audit quality. However, many audit committee leaders do not support some of the suggested reforms, such as mandatory auditor rotation and restrictions on non-audit services.

As a way out of this quandary, audit committees are taking a range of formal and informal measures to assess auditor performance. These include regular face-to-face meetings with lead audit partners, analysis of auditor interactions with internal audit and management, external auditor presentations on quality as well as quantitative and qualitative surveys of management views.

To assess the quality and performance of their audit firm, audit committees put significant weight on the lead partner’s personal attributes and performance. Primarily, they look for

•the sharpness of their judgement based on a deep understanding of the principles underpinning accounting standards, rather than just knowledge of “the rule book”

•a thorough, holistic view of the business, its strategies and its risks

•the ability to challenge management and articulate the rationale for the position to the audit committee

•the ability to build strong relationships and communications processes within the business and with the audit committee and the management in order to deliver information in a timely, clear, consistent and insightful manner.

Global capability is an equally important issue. Audit committees face difficulty in assessing the quality of audit work performed overseas, particularly in new or emerging markets. Unless their audit firm is a fully integrated global practice, the audit work performed in remote locations might be conducted by a local affiliate

Ultimately, the audit committee will have to rely on the lead audit firm’s ability to ensure that any work done as part of the audit is of the same standard wherever it is performed. For reassurance, the audit committee can raise a range of questions to reassure them about the quality of overseas audits.

Put bluntly:

•Can we see your audit plan, showing where you expect to focus resources, the extent of the review planned for each of our business entities and locations, and how this is driven by your assessment of audit risks?

•How does your firm capture and report audit concerns detected by your people in remote locations?

•What procedures or quality controls does your firm have in place to review audit work performed in its offices around the world and, where pertinent, by affiliate firms?

•How do you ensure that your and your affiliate’s staff are trained to the same standard, follow a common audit methodology and ensure professional independ-ence and objectivity?

These are some of the considerations being discussed by the audit committees of top European companies. However, most of these deliberations could easily and fruitfully be adopted by local audit committees to discharge their responsibilities using best practice.

Anthony Doublet is a partner and head of assurance, EY Malta.

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