Securities regulators globally are troubled enough by the state of audit quality that they are developing a white paper to promote better audit committee oversight.
The International Organization of Securities Commissions, of which the Securities and Exchange Commission is a member, has published a consultation paper that is being reviewed by its board and members regarding practices that should be promoted among audit committees to “support external audit quality.” The paper acknowledges auditors have primary responsibility for audit quality, but it seeks to identify and promote ways audit committees can stoke the process.
IOSCO notes that audit regulators globally have reported 40 percent of audits inspected globally exhibited problems in achieving the fundamental objective of the audit, which is to provide reasonable assurance that financial reports are free of material misstatement. While that doesn’t mean financial reports were materially misstated, it means auditors didn’t successfully perform audits in compliance with standards to adequately support clean audit opinions. The draft paper also notes audit committees vary across listed entities, even within the same jurisdictions, producing an inconsistent approach to external audit oversight.
The proposed IOSCO paper recommends a handful of good practices that securities regulators globally should promote among audit committees to better promote audit quality. For starters, the paper suggests audit committees should develop a recommendation on the selection of auditors separate from management’s recommendation, with selection criteria established upfront and bids assessed against those criteria. “The focus should be on audit quality and not fee reduction,” the paper says. “Opinion shopping should be avoided, and auditor independence should be a key consideration.”
The paper suggests audit committees should consider the extent to which auditors devote sufficient resources to the audit, including demonstrating an understanding of the business and its risks, the skill and expertise of audit team members, the firm’s supervisory approach, the auditor’s reliance on experts and other auditors, the strategy and scope of the audit, and accountability. It also suggests audit committees should consider fees only to the extent they are consistent with the audit plan and a quality audit.
In addition, the paper makes further detailed recommendations for audit committees to review and challenge things like quality and timely reporting, appropriateness of accounting treatments and estimates, systems, and controls, auditor independence, and communication with the auditor. The paper also suggests audit committees should be tasked with consulting third-party advice, not the auditor’s advice, on tricky accounting treatments.
IOSCO is accepting comments on the draft through July 24.