In a February 22 presentation entitled “Back to Basics” at the annual SEC Speaks conference in Washington, SEC Chief Accountant Paul Beswick discussed audit committee responsibilities and reiterated his concerns about audit committee efforts to reduce audit fees, such as by switching to a lower-cost auditor. “We keep hearing stories about some audit committees fee-hunting,” he said.
Mr. Beswick’s audit fee comments expanded on those in a December, 2013 speech (discussed in the January 2014 Update) in which he warned that “audit committees may be focusing too much on the amount of the fee and not focusing enough on the expected audit quality.” In his recent remarks, he added that, in his view, corporate cost-cutting motivated by a slow economy should not extended to audit fees: “I wouldn’t actually think audit fees should fluctuate with the state of the economy. In fact, as the economy gets worse, I would think the auditors need to spend more time.”
He also warned that a fee reduction followed by an audit failure could raise questions about whether directors had violated their fiduciary duties. “The message here is that the “bottom line” should not drive the decision to retain and or hire an auditor. The decision should focus on which auditor is going to protect the interests of shareholders best.”
Other topics addressed in Mr. Beswick’s presentation included –
The audit committee’s responsibility to evaluate critically the qualifications and performance of the auditor and not to act “as a ‘rubber stamp’ for management’s recommendation.”
The audit committees’ responsibility to independently oversee the audit and not to function “as an advocate for management.”
The audit committee’s responsibility to resolve disputes between management and the auditor, including, were necessary hiring independent counsel and other advisers to assist the committee.
The audit committee’s responsibility to understand the nature and scope of proposed non-audit services and to monitor transactions and relationships that could affect independence. As an example, he cited the SEC’s recent report on audit firm loaned staff arrangements (discussed in the February 2014 Update).
The content of audit committee reports. He pointed out that audit committee reports need not be limited to the content required by the SEC’s rules. “Audit committees are able to include additional disclosure that would be relevant to investors” and should “consider what information shareholders would find useful to make an informed decision about ratifying the selection of the auditor.”
Comment: Mr. Beswick’s comments seem consistent with the Commission’s renewed emphasis on the role of “gatekeepers,” particularly those that influence financial reporting. With respect to audit fees, as noted in the January 2014 Update, decisions to change auditors should be based on the experience and qualifications of the incoming firm, not solely on its fee proposal, and the record of the committee’s decision-making should explain the basis for its decision. As to audit committee reporting, it appears that the SEC staff is joining the calls for voluntary additional disclosure. As noted in the November-December 2013 Update, the Center for Audit Quality, in conjunction with several organization representing directors and audit committee members, has also urge audit committees to expand their reporting.