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6 Key Takeaways from IOSCO Audit Committee Survey

Jun 21st 2016
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Audit committees worldwide have significantly ratcheted up their oversight of auditors, according to a new report by the International Organization of Securities Commissions (IOSCO).

The report, based on a December 2014 survey, is IOSCO’s first in 10 years.

Audit committees, too, have changed. More members now are required to be independent of the public entity and auditor, and possess certain skills and experience. The committees also play a bigger role in the selection of auditors and evaluation of their fees.

Almost all (96 percent) respondents indicated that public entities are required to have an audit committee (or similar governing body).

The survey report made these six key points about audit committees:

1. Independence. All respondents indicated that at least one member of the audit committee must be independent of the public entity’s management and the auditor. Most (76 percent) reported that at least a majority of committee members must be independent.

But how members’ independence is determined varies significantly, with 87 percent of respondents indicating that the committee is not directly responsible for auditor selection. The selection or recommendation made to shareholders may fall to the board of directors, which may not face the same independence requirements, the report states.

2.Special skills or experience. Increasing globalization and business risks require an increased skill set for audit committee members, the report states. Among 87 percent of respondents, at least one committee member must have special skills or experience.

“The specific skills or experience required varied among responding jurisdictions,” the report states. “Some require expertise and/or experience in accounting or finance, while others require that audit committee members have only an ability to read and understand basic financial statements. Supplementally, a small number of respondents also indicated that audit committee members are required to possess knowledge of auditing in addition to accounting and finance.”

3.Assessment of auditor independence. Almost all (90 percent) respondents require the audit committee to be “explicitly responsible” for assessing the auditor’s independence. The assessment includes consideration of nonaudit services provided by the independent auditor. Almost 100 percent of respondents reported restrictions on the types of nonaudit services that can be provided, but how those restrictions are determined varies.

4.Assessment of auditor performance. The majority (71 percent) of respondents require a periodic assessment of auditor performance. What actually is assessed, however, varies significantly. It may be subjective, such as relying on the audit committee’s perceptions, or may require objective and detailed criteria, the report states.

5.Auditor communications. Communications are required among 80 percent of respondents. But what’s actually required, and how frequently, generally is up to each jurisdiction’s adopted standards. Communications also may be regulated in statutes or rules, particularly in the European Union.

6.Transparency. Among respondents with developed capital markets, 61 percent require transparency reports. In growth and emerging markets, 15 percent do so.

“Transparency reporting is a tool employed by certain audit firms to communicate to investors and stakeholders with respect to audit firm governance and elements of the audit firm’s system of quality control for their audits,” the report states. “Transparency reporting can foster internal introspection and discipline within audit firms and may encourage audit firms to sharpen their focus on audit quality.”

As to audit committee transparency, 79 percent of respondents require shareholders to vote on auditor selection. But 49 percent require committees to tell shareholders what their process and results are for auditor oversight.

IOSCO’s website states that the organization is the leading international policy forum for securities regulators. Members regulate more than 95 percent of securities markets in more than 115 jurisdictions.

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