Improving Audit Quality - NACD BoardVision
Cindy Fornelli, executive director at the Center for Audit Quality, and Daniel L. Goelzer, partner at Baker & McKenzie LLP and former PCAOB chair, discuss how audit committees can effectively work with the Public Company Accounting Oversight Board (PCAOB) to improve audit quality and strengthen investor relations.
Henry Stoever: Hi. I'm Henry Stoever. I'm the chief marketing officer for NACD. On this episode of NACD BoardVision, we're going to be talking about audit quality broadly but more specifically how audit committee chairs and audit committee members can work with the PCAOB to help sharpen audit quality. I'm joined by Dan Goelzer, a partner with Baker & McKenzie. I'm also joined by Cindy Fornelli, the executive director for the Center for Audit Quality. Cindy, what do you think opportunities exist for audit committee members to help amplify and articulate to the public and to the PCAOB what they do to really insure a high quality audit?
Cindy Fornelli: Well, as we all know, the audit committee is a key linchpin for audit quality. And we've always maintained at the CAQ that a strong audit committee can increase or enhance audit quality working with the external auditors. So it's very important that the audit committee and its members understand the PCAOB's processes, understand the inspection findings, and discuss those with their auditor. But then the piece that is also important is how do audit committees communicate with or correspond with investors and there aren't really a lot of good mechanisms for that. And so we think working with the NACD that it's really important that audit committees have a good communication with investors through the audit committee report and the proxy statement.
Henry Stoever: Dan, what are some things that you could imagine that audit committee members and directors do to help shape what the PCAOB's doing to insure a high quality audit?
Dan Goelzer: I think it is very much a two-way street. The PCAOB has done a number of things over the last few years to try to support the work of audit committees. For example, they've revised the standards on what the auditor has to communicate to the audit committee and a lot of that revision is aimed at making sure that the audit committee understands the risks and challenges associated with the audit and that they get feedback from the auditor about problems or matters encountered in performing the audit that might help the audit committee do its job better.
Henry Stoever: The PCAOB's inspection process can create, not that it always does, but it can create erroneous perceptions in the marketplace whether it's with the media, whether it's with investors, or others because an audit committee failure does not equate to an incorrect financial statement. What are some things that you think that the PCAOB can be doing and vise versa that audit committee members can be doing to help one another understand what the findings are from that audit committee inspection?
Dan Goelzer: From an audit committee perspective, I think the report that the PCAOB issues on the auditors inspection should be the starting point of a conversation. The PCAOB itself says that these reports aren't intended as a balance report cards or overall assessment tools for the accounting firm. So I think though that the reports do contain information that the audit committee can use to have a conversation with their auditor and understand better the quality of the services.
Henry Stoever: Do audit committee members actually reach out and say, well, help me understand what did we do that gave us a failure?
Cindy Fornelli: Typically not. I don't think that that is a communication line that has been strong over the years because again the PCAOB doesn't have jurisdiction if you will over audit committees, only 1/2 of the equation, the auditors. And I also think part of the issue that you're touching on, Henry, that's really important is that the inspection findings aren't meant to be a public document that is useful for investors to understand what's going on in the audit. Probably not even necessarily that much of a useful tool for an audit committee unless there's this robust conversation that Dan's talking about. Because they are -- they're almost done in shorthand and so you need to have that dialogue and there's really no mechanism to have a public dialogue between the audit committee, the auditor, and the PCAOB. So it's really incumbent on audit committees and auditors to have this conversation. And I would dare say it's incumbent upon the auditor to proactively have a conversation with the audit committee. Now if you're an audit committee member and your auditors are not having this conversation about the inspection findings, then I think it's fair to ask. But the other thing about the inspection findings are that, you know, they're not a random selection of audits. These are targeted for high risk areas. And so when you talk about the findings and the press, that's where it can be a little deceptive because you think oh, my gosh. You know, there's a 27 percent deficiency rate increased X percentage over last year. That must be a really bad indictment. But it's not a random selection of the audits. It's high risk areas that are difficult, that require a lot of judgment both for the auditor, for management, and for the inspector too.
Dan Goelzer: The PCAOB is looking for audits that they think are most likely to have deficiencies so naturally they find deficiency.
Henry Stover: Is there anything else you'd like to add, Cindy?
Cindy Fornelli: Yeah. The only other thing I would want to add is that I think it's important because we're focused so much on these inspection findings. In large part that's because there's really nothing else out there to help judge audit quality. And so we've been working very diligently over the last two and-a-half years on trying to develop audit quality indicators that would be another tool for audit committees to use to have a dialogue with their audit team, their engagement team outside of the inspection findings. Although inspection findings are one of the indicators that we use but it's one of about a dozen. And again, looking for another way to increase the dialogue around audit quality that isn't solely tied to the inspection finding.
Henry Stoever: Dan, thanks so much for your time. Cindy, as well, thank you so much. On behalf of NACD and CAQ and Dan, this is NACD BoardVision.
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