International regulators are developing a broad proposal to call for improvements in audit committee oversight of external auditors.
The International Organization of Securities Commissions, of which the Securities and Exchange Commission is a member, issued a consultation report on measures audit committees should be taking to do their part to promote quality audits. The report proposes “good practices” audit committees should pursue with respect to the qualifications and experience of audit committee members, their knowledge of financial reporting and audit, and their mindset in terms of challenging auditors and demonstrating a “questioning mind.”
IOSCO says audit committees should develop a recommendation on the selection of auditors, without help from management, following selection criteria that are established in advance. Audit proposals would be measured against those criteria. “The focus should be on audit quality and not fee reduction,” IOSCO says. “Opinion shopping should be avoided, and auditor independence should be a key consideration.”
The report also proposes some approaches audit committees should take in assessing potential and continuing auditors, setting audit fees, facilitating the audit process, assessing auditor independence, communicating with the auditor, and assessing audit quality. IOSCO has no rule-making authority, but the report is meant to give audit committees some guidance directly on what they can do to promote and support audit quality.
While the Public Company Accounting Oversight Board has called out plenty of audit quality problems in the United States, auditor regulators globally have flagged similar concerns in other countries. The International Forum of Independent Audit Regulators, of which the PCAOB is a member, reported in 2017 that auditors globally failed to meet assurance standards in some 40 percent of audits inspected by regulators.
While auditors have primary responsibility for audit quality, the audit committee has an important role to play, IOSCO says. “The quality of a company's financial report, supported by an independent external audit, is key to market confidence and informed investors,” the proposal says.
In a comment letter on the proposal, the Center for Audit Quality says it supports the notion that audit committees should manage the process of selecting, appointing, and replacing auditors, and the establishment of auditing fees. Those are requirements on U.S. audit committees under Sarbanes-Oxley, the CAQ says. The CAQ also points to work in the United States to develop audit quality indicators, which could drive discussion between engagement teams and audit committees that could “enhance the understanding of the audit process and drive actions that could increase audit quality on the engagement.”