New tool aids in evaluation of external auditors

BY KEN TYSIAC
October 15, 2012

With interactions between audit committees and external auditors a focus of a steady stream of news recently, a new tool has been developed to assist audit committees in annual evaluations of external auditors.

The Center for Audit Quality (CAQ), which is affiliated with the AICPA, is one of seven organizations that helped develop the tool. It is designed to help audit committees make an informed recommendation to boards of directors on whether to retain their auditor.

Public company audit committees are responsible for hiring and monitoring auditors, and the tool provides guidance on how to perform those duties. The guidance also could be used by audit committees at private companies, not-for-profits, and government as well as others who monitor external audit services, including company boards, oversight bodies, and even management.

“In assessing information obtained from management,” the tool says, “the audit committee should be sensitive to the need for the auditor to be objective and skeptical while still maintaining an effective and open relationship.”

The tool will operate in a space that has received significant scrutiny over the past few years. The European Union is debating mandatory audit firm rotation requirements proposed by the European Commission. The PCAOB is exploring the idea of mandatory audit firm rotation for public companies in its project aimed at enhancing auditors’ independence, objectivity, and professional skepticism.

In addition, a PCAOB standard regulating audit committees’ communications with external auditors has been forwarded to the SEC for ratification.

The new evaluation tool states that public focus on how audit committees perform, including how they oversee external auditors, has increased significantly. During a PCAOB hearing in March devoted to enhancing auditors’ independence and objectivity, audit committee chair Cathy Lego said audit committee members are devoted to that oversight.

“The audit committee is there on behalf of the board to oversee the integrity of the financials,” said Lego, who chairs the audit committees of California-based tech companies SanDisk and Lam Research. “We are there to appoint, to compensate, to look over the qualifications, review the independence, and perform an evaluation of the firms. We do that periodically. We may need to add a little more rigor around the timing of that, but we do it.”

The new tool says audit committees should evaluate auditors annually to make an informed recommendation to the company board on whether to retain his or her services. The tool says the evaluation should assess:

  • The auditor’s qualifications and performance.
  • The quality and candor of the auditor’s communications with the audit committee and the company.
  • The auditor’s independence, objectivity, and professional skepticism.


Sample questions in the tool highlight important areas for consideration. The guide also encourages audit committee members to evaluate the auditor’s performance throughout the audit process.

“These contemporaneous assessments provide important input into the annual assessment,” the tool states. “Audit committees may wish to consider those contemporaneous observations during a more formal assessment process, perhaps by using a questionnaire or guide that considers all relevant factors year-over-year.”

Last week, the CAQ also issued a practice aid on how external auditors and audit committees should proactively communicate in a timely and forthright way about PCAOB inspections and audit firms’ quality-control matters.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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