Audit committees should keep the independent, or external, auditor apprised of issues which “keep them awake at night.” Similarly, independent auditors have a responsibility to inform the audit committee of their concerns.
Some best practices to help foster a close, productive working relationship among audit committees, independent auditors and management are discussed below.
- Regular Meetings
- Audit Committee Work Plan
- Interaction with the External Audit Firm
- In Camera Meetings
- Disclosure of Audit Fees
- Statement of Corporate Governance Practices
- Evaluation of the Independent Auditor
A best practice for audit committee chairs is to make themselves available to the independent auditor on a regular basis, and one of the best ways of doing this is through a series of face-to-face sessions prior to each audit committee meeting:
- The first session should be with the CFO to create the proposed agenda for the audit committee meeting and to agree on information that will be provided to the committee.
- The second session should be with the independent auditor alone to obtain the auditor's input on the agenda, discuss any concerns he or she may have and obtain the auditor's views on the progress of the audit.
- The third session should be with the independent auditor and management together. This meeting's purpose is to finalize the agenda, review the materials management has prepared, enable the audit committee chair to explore more fully any differences of opinion that may exist between management and the auditor, and determine how to present these matters to the audit committee.
Review our suggested Agenda Items.
The audit committee chair should work with the independent auditor and management to create an audit committee work plan for each fiscal year. This work plan should include regular matters that come before the committee in accordance with its charter, and any other matters of significant concern or interest that the chair, management and/or the independent auditor believe the committee should be aware of and should discuss.
The audit committee work plan should also include an educational component that covers subjects such as:
- a tour of the balance sheet;
- an analysis of the income statement;
- a review of major subsidiaries;
- a discussion of financing vehicles;
- a series of presentations on the business of the company;
- a review of special corporate projects, such as a major information technology initiative or a new acquisition; and
- a review of new accounting and other external developments.
A sample audit committee work plan is presented here.
A best practice is for independent auditors to consult with the audit committee with respect to the senior audit team members assigned to the company. It is important for the audit committee chair to get to know the lead audit partner and his or her senior team members so both parties can develop a sense of each other's working style and have confidence and respect for each party’s responsibilities. Such a relationship also establishes an environment in which clear, direct and candid communication not only takes place, but also flourishes.
It is equally important for the audit committee chair to establish a relationship with the CEO or senior partner of the external audit firm. If this is not appropriate due to either the size or location of the company, then a relationship should be forged with another senior management partner of the firm.
Establishing these communication channels permits ease of access when issues arise that require either consultation or intervention with or at the highest levels of the audit firm.
A best practice is for each audit committee meeting to include a series of in camera meetings with the independent auditor, management and the committee members only. It is the audit committee chair's responsibility to include these meetings on every audit committee meeting agenda and ensure that sufficient time is set aside for them at each meeting. Regular in camera meetings with the independent auditor makes them less threatening to management, while providing the independent auditor with an opportunity to communicate privately and candidly with the committee. Similarly, these meetings provide the committee with the opportunity for candid questioning of and private discussions with the independent auditor. This process is an excellent relationship-building device.
Use our Checklist for the Audit Committee Meeting with the Independent Auditor to prepare for your next meeting.
The new independence rules require the disclosure of professional fees paid for audit and non-audit services. The categories of reportable fees are:
- Audit fees,
- Audit-related Fees,
- Tax fees, and
- All other fees.
Companies must disclose fees paid to the independent auditor in each of these categories for the two most recent fiscal years. Other than the “audit fees” category, the company must describe the types of services provided. The expanded disclosures may be provided in either the company's proxy statement, the periodic annual filing, or in the Annual Information Form (in Canada).
In general, "Audit-related fees" are for assurance and related services (e.g. due diligence services) that traditionally are performed by the independent auditor. Examples of these services would include:
- employee benefit plan audits,
- due diligence related to mergers and acquisitions,
- accounting consultations, and
- audits in connection with acquisitions..
Many tax services require an in-depth knowledge of the organization, and the fees associated with such services are often substantial. Investors will benefit by having the ability to view the extent of tax fees separately from “all other fees.” Except for services related to the audit, the "tax fees" category should capture all services performed by independent auditor’s tax professionals such as:
- tax compliance,
- tax planning, and
- tax advice.
A best practice is to disclose information that would help shareholders and other stakeholders better understand the relationship that exists between the company and its independent auditor, the way the audit committee monitors the auditor's independence and the extent of audit, and the audit-related and non-audit services provided by the auditor.
Such disclosure should make it clear that the independent auditor is responsible for maintaining his or her objectivity and for complying with all applicable independence regulations and requirements, while the audit committee is responsible for assessing whether the auditor has done so.
This disclosure should be integrated into the Statement of Corporate Governance Practices required for TSX-listed companies.
Key elements audit committees should consider including in the disclosure of the company's corporate governance practices are:
- The audit committee's role and responsibilities (i.e., mandate and charter).
- The activities of the audit committee, including:
- How it monitors the auditor's independence.
- Its role and activities in the oversight of risk management and internal controls
- Its role and activities in the review of critical accounting policies, accounting estimates and judgments made by management in the preparation of the financial statements, and
- Its role and activities in monitoring the plan and the activities of internal audit.
- The qualifications of the audit committee members (i.e., independence and financial literacy).
- The fees for both audit and non-audit services provided by the independent auditor.
- Statements that:
- The independent auditor is accountable to the audit committee and board of directors as representatives of the shareholders.
- Audit committees must clearly communicate their expectations for the independent auditor's performance and the auditor must communicate how he or she intends to respond to those expectations.
- The auditor's provision of audit-related and non-audit services can help improve the effectiveness of the audit but the audit committee must mitigate the potential risks to independence.
- Audit committees should ensure the prompt, candid and ongoing communication among management, the auditor and the audit committee regarding any material misstatements in the financial statements.
- While audit committees should seek management's input, they should not delegate to management the responsibility for negotiating audit fees with the independent auditor.
- Shareholders should be informed of the fees paid to the auditor for audit audit¬-related and non-audit services, and how the audit committee monitors the auditor's independence.
Audit committees should take responsibility for evaluating the independent auditor's performance, though the audit committee should solicit the input of management. The assessment should cover the professional competencies in conducting the audit, value-added recommendations made by the auditor, and client service issues. This process should be formalized by the audit committee and conducted annually.
Use our publication to assist you when designing the external auditor evaluation process: Guidelines for Gathering Information About the Independent Auditor.