Q&A: Audit committee outlook from a committee chair and former EY auditor

Q. How have you transitioned your experience as a career auditor into now serving on and chairing audit committees? How has that perspective shaped your approach to audit committee service?

A. Historically, audit committee chairs were and are predominantly retired CFOs. From that perspective, it’s not surprising many of them think of an audit as something being done to them. When coming from that mind set, their approach can be “let’s get the fees down.” My perspective is different. I’m starting from the standpoint that the audit is one of the most important inputs to the board’s role. Auditors are additional “on-the-ground” eyes and ears for the board. For me, fees are not the biggest thing. I want auditors to get a fair fee so they are not tempted to shortcut what they do, but I also have to take in the considerations of the shareholders, of course, so I also want a good price. I know how to get cheap audits, and with a cheap audit you don’t get the best team. They will cut back and do the minimum they have to do, and that’s not in the interests of the shareholders or the board. Most boards are comfortable with CFOs as audit committee chairs. They think it will be more helpful because of their experience with the Street and they can be a mentor to the CFO, but most career auditors can do that too. The best audit committees have both the CFO and auditor perspective. The responsibilities of audit committees are very broad, so it’s good to have members who see it from both perspectives.

Q. Do you feel a sense of heightening expectation on audit committees to be more proactive in their management of the external audit?

A. There’s a growing expectation for the entire board to be more proactive across the entire board agenda. The types of roles we play in the boardroom are different than they were even a decade ago. Board members are more informed, more up-to-date, more prepared. The questions they ask are more sophisticated. There are fewer boards that just take what the CEO feeds them. That’s old style. Cronyism is coming out of the board room, and audit committees are a lot more engaged than they used to be as well. When I think back to my interactions with and presentations to audit committees years ago, I did not get many questions that were deeply insightful. Now I am pretty impressed with my audit committee and board colleagues.

Q. Are more audit committees regarding the audit as a critical service rather than a necessary compliance exercise?

A. It often depends on the audit committee chair. The audit committee chair is the one most likely to set the tone around how the board thinks about the audit. There have been plenty of cases where management, in a dutiful effort to protect budget, have put undue pressure on auditors to decrease scope. They might ask, for example, whether auditors need to spend a lot of time in a particular jurisdiction that is not material. But there are also high-profile examples of problems in a small jurisdiction that did serious damage to the brand and the share price of very large companies. Is it not in the interest of the company, even if the audit fees are a little higher, to have a bit more of a dive into that area? I don’t think there’s a trend one way or the other. I go to all the conferences, forums, and breakouts for audit committees, and I notice some audit committee chairs saying they have to get fees down and other saying it’s not a priority. Auditor fees are usually a fraction of those paid to bankers and lawyers. For what they do for the board, it’s really good value for the money. And if it’s not, we can change firms or teams. Boards and audit committees have the explicit power and authority to do that.

Q. To what extent do you rely on information directly from the audit firm? Do you also conduct any kind of research beyond your interaction with audit firms?

A. You look at what’s coming out from the regulators, management’s experience working with the auditor, and your own experiences. Look at your experiences working with them in different environments. I work with all the firms either as auditors or consultants across my board portfolio, I go to the technical update conferences, read the regulatory reports, and I have my own view about the assessments. I talk to the firms about them. It would be a big concern if it were my specific audit team being described in those reports. Some of the companies where I do or have served as audit committee chair have been selected for the audit firm’s inspection and I have been interviewed by the regulators as part of those reviews. In those cases, I am particularly interested in what comes out and I, with the audit committee and board, can then decide whether it is a minor concern or a major concern to us. But it is important to remember that it’s the regulators’ job to report their findings. If they’re not writing something, everyone would be critical of them.

Q. We have seen audit committees increasing their voluntary disclosures regarding their oversight of auditors. Does that generally suggest increased oversight activity?

A. The first time I saw the Center for Audit Quality’s disclosure barometer, to be absolutely honest, I was offended by it. Everyone gives us grief about the volume of disclosures, so why would we add more disclosure just to say we’re doing our job. I thought it was clear from our charter. Then I started engaging with the shareholder community over it, and I was shocked by their support of it. They wanted it written in a report, with a signature on it, so they would know it was done. If it makes my shareholders happy, OK, then I’m going to do it. At one particular company, we expanded our disclosure, and it went from two paragraphs to more than two pages. The experience was enlightening. By actually putting it on paper, we ended up having a conversation we might not have otherwise had, and it caused us to clarify our policy around the approval of the external audit work. It was a good exercise.

Q. Do you follow a formal process for assessing the performance of external auditors? Can you describe it?

A. Yes, and it differs by company and by country. In Canada, they are doing a lot to really push the way boards assess auditors. An evolving best practice has the audit committee and auditors agreeing on “audit quality indicators,” and we have those reported to us at every meeting by the audit firm. Things like ratio of partner time to staff time usually goes into a bid for an audit, but then we never heard about it again. Now they have to report to us how many partner hours went into the audit by area and how many staff hours. We look at things like how much the external auditors are using digital tools to do the audit. We’ve set up AQIs to monitor what they do, and we survey the audit committee and management staff around performance against these and a number of other criteria. Then we sit down and talk about what we want to be different and how happy we are with the outcomes. We also bifurcate the audit committee view from the management view. Management might find the auditor to be a real pain, but within the boundaries of a constructive debate that might be in the interest of the board and the audit committee.

Q. What about changing audit firms?

A. It depends on the jurisdiction. In the U.K., with the rotational rules, audit committees have more experience with auditor changes there by far. Changing firms is a big, disruptive event. Even the bid process is a big effort, and it costs a lot of money. If you’re going to change firms, you have to have a really good reason for doing so. If you’re going to change teams, that should be done when you believe you are not getting the service you need or the challenge you need. People worry about long tenure, but I’m more interested in the people, whether the relationships are working. In the United States and many other countries, you have to rotate the engagement partner every five years. When you have a firm with a long tenure, how many CEOs, CFOs, audit committee chairs, and engagement partners have you had in all that time? All the people are changing. If you feel there is too much coziness going on or you are not happy with the quality of the audit, you may find a change in the engagement team is just as effective but much less disruptive than a change of firms.

Q. What benefits do you see emerging from increased auditor oversight?

A. That’s a hard question for me to answer because personally I’ve always applied strong oversight of my auditors. I suspect that audit firms have mixed views when they know I am joining a board. They know I know my job and I’m going to fight for them, but on the other hand, I hold them accountable and they may be less likely to get away with something with me were they so inclined. I understand what the regulators expect of an audit committee, and I work hard to meet or exceed that expectation. The downside of an audit committee and its chair not doing their job effectively is that the company and shareholders are at greater risk. The benefit of increased oversight is a decreased likelihood of audit or even company failure.