16 April 2013

FEE comments on the role of the audit committee in external auditor oversight

FEE very much welcomes this collaborative initiative by CICA and the CPAB focussing on three interrelated key areas in enhancing audit quality - the independence of auditors, the role of audit committees, and auditor reporting.

The CICA - CPAB Discussion Paper concentrates on a strategic part for the profession of the main attributes of a well-functioning audit committee, which is the role of the audit committee in external auditor oversight. In all initiatives, FEE has tried to develop thought-leadership ideas on the functioning of audit committees as a whole, and not to concentrate on this specific point of view.

In general, audit committees are deemed to help minimising financial, operational and compliance risks and enhancing the quality of financial reporting.

According to the European current debate, two activities may be added to the list:

The approval or pre-approval of the provision of non-audit services: according to the European Statutory Audit Directive – which is in the process of being revised – the auditor should discuss together with the audit committee threats to independence as well as safeguards to be applied to mitigate those threats in relation to the provision of non-audit services. It has to be emphasised that one of the proposals in the revision of this directive, which is heavily discussed, entails that, in public interest entities, the audit committee would have to pre-approve the provision of some non-audit services. FEE believes that audit committees could have an important role to play in this area.

The appointment of the auditor: according to the European Statutory Audit Directive – which is in the process of being revised – the audit committee is involved with the appointment of the statutory auditor or audit firm as the appointment in a public interest entity should be based on a recommendation made by the audit committee.

The proposals in the revision of this directive include a number of initiatives to strengthen the involvement of the audit committee in the selection process and the appointment of the auditor. These measures entail that, in public interest entities, the audit committee is to be explicitly responsible for the procedure for selection and appointment of the auditor, which includes:

• Organising audit tenders at regular intervals in case of the mandatory audit firm rotation; and
• Deciding whether or not to appoint more than one auditor.

FEE agrees to strengthen audit committee, and in particular in relation to the process of selection and appointment of the auditor, but does not support these European Commission proposed measures that are too prescriptive and could be seen as a contradiction to the audit committee decision-making authority. Indeed, prescriptive measures ignore judgement of those charged with governance, especially the audit committee, to determine if and when to rotate auditors.

FEE agrees that guidance for audit committees on how an audit committee could undertake an annual evaluation of the external auditor would be helpful. This assessment activity is an important task for audit committees and guidance would steer audit committees away from using subjective criteria.

FEE is very interested in the concept exposed in Chapter 3 ‘Conducting a Comprehensive Review of Audit Firm’. As explained in the CICA - CPAB’s discussion paper, in addition to the audit committee’s annual assessment of the external audit, it is proposed to implement a comprehensive review that would focus on the audit firm, its independence and the application of professional scepticism, and would be performed every five years. In the current European debate, there is not a clear distinction between both types of assessments, but it is true that a five-year analysis could give the audit committee another vision to evaluate audit quality.

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