Audit Committee Guidance for Evaluating the External Auditor

Inside Americas Boardrooms
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Increasingly, investors are seeking transparency into how today's audit committees are fulfilling their duties in the boardroom. While disclosure around financial reporting oversight is heavily regulated, the disclosure for other audit committee responsibilities is not--particularly around the committee's role in appointing and overseeing the external auditor.

The Center for Audit Quality (CAQ) publishes an External Auditor Assessment Tool, which helps audit committees do just that. In this episode, the CAQ's Erin Dwyer, Managing Director of Stakeholder Engagement & Communications, highlights trends in audit committee disclosure and explains how a well-structured evaluation can improve both audit committee decisions and investor relations.

It's not a requirement that audit committees do an annual evaluation but [the CAQ] believes, as do others, that it's a best practice for audit committees to annually evaluate the external auditor...As the old saying goes, you can't manage what you don't measure. - Erin Dwyer, Managing Director of Stakeholder Engagement & Communications, Center for Audit Quality

Going through the evaluation process, Dwyer explains, allows audit committees to make an informed recommendation to the board on whether the external auditor should be reappointed. Additionally, disclosing the committee's evaluation process reflects important strides in shareholder engagement.

''We hear constantly from investors that they believe good governance enhances long-term shareholder value,'' said Dwyer. ''So they're looking for additional information and assurance around how the audit committee is performing its role...We think performing an external auditor evaluation is one way they can provide this information.''

According to Dwyer, only 26% of S&P 500 audit committees included a disclosure around external auditor evaluation in their proxy statement, despite the fact that most committees conduct these assessments annually (via the CAQ's 2018 Transparency Barometer).

The External Auditor Assessment Tool includes a sample set of questions that audit committees can use in their evaluation. Updated for 2019, the framework now takes into account new accounting standards (e.g., Auditor's Report, Form AP), as well as potential risk areas related to cyber and emerging technology.