“Statutory auditors must do a better job and must be better controlled”, says the European Commission as it designs a stricter professional framework for audit firms. It also requires that audit committees be more involved in verifying the independence and quality of the audit work. Are audit committees trained for this task and ready to take on this responsibility?
Each time a major financial scandal emerges, the eyes of the world turn to the statutory auditors and finger point the flaws in their working methods. As a result, regulators impose a stricter framework for the independence and competence of audit firms. This leads to a closer supervision of the profession and a more careful monitoring of their work.
The European Commission undertook a profound reform of the audit profession in 2016. It consists of four new key measures: direct supervision of audit firms, strengthening of the audit committee, rotation of auditors, and prohibition of certain complementary services.
What is the impact on audit committees? In a first instance, directors who are members of an audit committee must upgrade their skill set: finance and accounting, risk management, fraud detection, and compliance. The second impact is on the involvement of the committee. It can no longer limit itself to taking note of the final opinion. It must now be involved in the method and means of a decision: understanding the audit scope, evaluating risks, discussing control deficiencies, and assessing audit results. The function of audit committees has thus become heavier and riskier than it has ever been.
In the aftermath of the Carillion scandal in 2018, the UK regulator has also initiated extensive reflection on the role of the audit committee with regard to statutory auditors. This reflection is not over; the Competition & Market Authority has called for substantial reform to ensure audit committees play a bigger role in selecting auditors and monitoring audit quality. The regulator is expected to set up an enforcement regime holding audit committee chairs to account for their duties, and potentially conducting investigations when there are suspicions that the audit committee is falling down on the job.
Once again in 2020, with the Wirecard affair shaking the German corporate world, the audit profession is in the spotlight. A commission begins its inquiry in the Bundestag this October. The Wirecard scandal puts the German two-tier board system under scrutiny. Is the supervisory board not too distant and detached from operations? The audit committee should have a clear remit, be more accountable and involved, and adopt an interventionist mindset.
If, as some say, major scandals follow periods of industrial or technological stress, it is essential to pay attention to the preservation of the quality of financial information and the set of controls that guarantee it.
What is the lesson for the audit committee?
It needs to:
- Upgrade their skill set;
- Question with curiosity;
- Know their auditors better;
- Take responsibility.
Are we up to the task of challenging our controllers?
Xavier BEDORET
October 2020
