Insight

Setting clear expectations for internal and external auditors

​AC oversight of auditors, while viewed by most ACs as effective, continues to pose challenges for ACs in a number of areas.

Because external and internal auditors play a vital role in the financial reporting process, effective oversight of auditors is a core responsibility of the audit committee.

Under the Sarbanes-Oxley Act (SOX), the AC of all U.S. public companies is “directly responsible for the appointment, compensation, and oversight” of the external auditor, including the resolution of any disagreements between management and the auditor regarding financial reporting matters. In fact, many ACs are emphasizing their ownership of hiring and firing decisions regarding the external auditor. A good working relationship between the audit committee chair and the lead audit engagement partner is essential—both to the AC’s effectiveness and to the effectiveness of the engagement team.

An important responsibility of the AC chair is to ensure that the AC devotes sufficient time to:

  • Evaluations of the audit firm and internal audit (IA)—both formal and informal
  • Succession planning for (i) lead partner and key members of the engagement team, and (ii) the CAE and key members of IA and financial staff. AC chairs need to establish a process for AC members to get to know key members of the engagement team and IA team.
  • Discussing with the external auditor and management the auditor’s plans for implementing the PCAOB’s new auditing standard, which will expand the audit opinion to include a discussion of critical audit matters (CAMs). The CAMs requirements will take effect for audits of fiscal years ending on or after June 30, 2019 for large accelerated filers.

AC chairs often help to clarify the role of IA:

  • Do the AC, the CFO, and others have a crisp, shared vision as to what the role of IA is at the company? (There is often a wide difference of opinions.)
  • The responsibilities of IA are now broader than financial audits and SOX 404, often including operational audits as well as involvement in risk management and legal/regulatory compliance.
  • Increasingly, IA is being asked to monitor the impact of the business and regulatory environment, as well as tone at the top and corporate culture, on the company’s compliance program.
  • There is a need to review IA’s mission and charter and ensure understanding of IA’s role in each of these areas.
  • AC chairs help ensure that IA’s resources and skill sets are properly aligned with its mission and responsibilities.
    • Is there a need for IT or foreign language skills?
  • Informal relationships between AC chair and audit engagement partner and CAE are critical.
    • AC chairs have frequent (often weekly) informal contacts.

AC chairs need to be consulted on CAE performance, compensation, and hiring and firing decisions.

Explore all topics in the Role of the Audit Committee Chair report


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