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January 26, 2015

Effectiveness of audit committees challenged by audit reforms

By Vincent Huck

Audit committees from around the world are calling for better information around technology and greater diversity of thinking amongst committee members to enhance their effectiveness, according to a survey by KPMG.

KPMG’s 2015 Global Audit Committee Survey gathered answers from 1,500 audit committee members from 36 countries. KPMG UK Audit Committee Institute chairman Tim Copnell said the most interesting findings of the survey had to do with how to improve audit committee’s effectiveness.

"From a UK perspective we had 58% of respondents saying a greater diversity of thinking on the committee would improve its effectiveness," he said. "And that is in an environment where all the codes and guidance and things coming out of Europe tell us again and again to have accountants and people with audit knowledge on the audit committee."

The survey respondents have in a way taken this as red, he continued. "They are saying fine there is a need for hard skills but actually there is also a big need for soft skills."

Copnell indicated that survey respondents highlighted the fact that while it is important to have audit committee members with accounting and auditing skills, it is also important to have members with a variety of other skills. And in particular survey respondents pointed at the lack of technology knowledge in audit committees as a big issue.

The second interesting finding of the survey according to Copnell had to do with the quality of the information at the audit committee’s disposal. Respondents were asked to rate the quality of the information they receive regarding specific topics and when asked about information concerning cybersecurity 90% of them raised some concerns.

Forty nine percent said that while the information received around cybersecurity is generally good some issues arise periodically, and 41% of respondent said that it needs improvement. Equally, 52% of respondents said the information they receive on the pace of technology change is ‘generally good, but issues arise periodically’, while 35% said it needs improvement.

"That is quite important, because these are the risks audit committees really engage with nowadays," Copnell said. "It is one thing to debate these issues, but if the information the audit committee has is below par then that is quite a difficult position to be in."

Audit reforms, auditors and audit committeesSixty two percent of respondents said external auditors could better support the audit committee by sharing industry-specific insights and views on the quality of the company’s financial management team.

Asked if this went against recent regulatory reforms around the world which tend to prohibit non-audit services to audit clients in an effort to guarantee the auditor’s independence, Copnell said he didn’t think so.

"The whole audit reform environment of the last five years, not just in the EU, has been to create more clarity about what is the audit role and the advisory role and obviously to prohibit non-audit service with a view to maintain independence and objectivity," he said before adding that most audit committee members would accept that.

"But at the same time they would argue that as a result of that process, the relationship between auditors and audit committee has changed such that the auditors no longer provide perhaps a richness of support as the audit committee would wish," he continued.

Copnell added that by richness of support he didn’t necessarily meant the provision of additional services but rather the possibility for the audit committee to tap into the huge resources and industry knowledge of the audit team. "So I think it is around a better, more enhanced, audit service where audit quality is improve as opposes to provision of non-audit services," he concluded.

In relation to the EU audit reform, nearly half of the European respondents said that they had not yet address the issues that might arise from mandatory firm rotation and restrictions on certain non-audit services.

For Copnell this reveals the degree of uncertainty the market is currently facing. With European Member States currently transposing the European reform into their national laws, and the risk of seeing a patchwork of different adoption across Europe, Copnell believes that a lot of audit committees have adopted a wait and see attitude.

Related link:

KPMG international Audit Committee Institutes

 

 

 

 

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