The importance of timely and candid communication between the external auditor, management and the audit committee cannot be understated. This communication is imperative to allow each of these groups to understand what is expected and required of them to enable each group to effectively fulfill their responsibilities.
The board of directors and the audit committee should take responsibility to ensure that the lines of communication are open. They should take steps to ensure that the independent auditor can communicate directly with the audit committee regarding any issue or concern that may arise in the course of his or her work, either orally or in written form. Deloitte has found that, in many instances, informal communication with the audit committee may be just as important as formal meetings in maintaining open lines of communication.
In order to facilitate the communication of audit committee with independent auditor, we have assembled several leading practices in the following areas:
The chairperson of the audit committee must be available to the external auditor on a regular basis. In our experience, an effective way to ensure this is for the chairperson to establish a regular series of face-to-face sessions prior to each audit committee meeting:
Another responsibility of the chairperson is to work with the external 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 chairperson, management and/or the external auditor believe the committee should be aware of and should discuss.
The audit committee work plan should include an educational component. We recommend that it include subjects such as:
It is important to the success of the audit committee's relationship with the external auditor that the chairperson be consulted with respect to the senior audit team members assigned to the corporation. The chairperson should get to know the lead audit partner and his or her senior team members. This allows both parties to develop a sense of each other's working style and should help to promote both confidence and respect for the responsibilities of each party. It also establishes an environment in which clear, direct and candid communication can not only take place, but can flourish.
It is equally important that the chairperson establish a relationship with the CEO or senior partner of the audit firm engaged by the board. If this is not appropriate due to either the size or location of the company, then the relationship should be forged with another senior management partner of the firm.
Establishing these channels of communication permits ease of access when issues arise that require either consultation or intervention with or at the highest levels of the audit firm.
An important responsibility of the audit committee is to evaluate the external auditor's performance. Although the audit committee should bear the responsibility for ultimately assessing the auditor's performance, it 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 formalised by the audit committee and conducted annually.