Paul Beswick, the SEC’s Chief Accountant, discussed the role of audit committees at the recent SEC Speaks program titled “Audit Committees: Back to Basics.” Stressing the critical role that audit committees play in ensuring that the relationship between auditors and public company management is in the public interest, Beswick discussed both basic responsibilities and best practices for audit committees. Below is a summary of some of his key observations.

Evaluation of Auditors. Beswick noted that the PCAOB has a project to develop audit quality indicators. Nevertheless, he said that audit committees should have their own metrics for evaluating the quality of audits.

Relationship of Audit Committees with Auditors. Beswick indicated that auditors should have open access to audit committees and be able to call on members of the audit committee at any time. He noted with approval an audit committee chair’s statement that the auditors work for the committee chair.

Auditor Independence. According to Beswick, management and auditors have a shared responsibility to ensure the independence of auditors. Beswick stressed that an audit committee must have an adequate process for the preapproval of auditor services so that the committee fully understands the nature of any service to be provided by an auditor and the terms of the engagement letter for such a service in order to assess whether it is permissible or raises any issues with respect to auditor independence. In addition, he stated that audit committees must monitor all services being provided in light of changing relationships and changes to services. In this regard, he reinforced that a company must determine whether its auditor is providing any services to any business being acquired by the company or any of its subsidiaries. Beswick’s presentation noted the SEC’s recent section 21(a) report relating to the independence problem created by an auditor serving as an employee in performing a service that would otherwise have been permissible. We discussed the section 21(a) report in our January 31 post.

Auditor Fees. Beswick stated that he is concerned about audit fees that are higher when the economy is good than when the economy is bad. In his view, this seems to be the opposite of how audit fees should correlate with the state of the economy because an auditor may actually need to spend more time on an audit when the economy is bad. He also noted that he hears stories about audit committees seeking to minimize auditor fees and said that he would hate to see a situation where a lower audit fee resulted in a lower quality audit that violated SEC and PCAOB rules.

Audit Committee Reports in Proxy Statements. Acknowledging that securities lawyers may worry about additional risk, Beswick urged audit committees to expand their reports and explain how they discharge their oversight duties. His suggestion is similar to one made by the Center for Audit Quality and others.

Best Practices. Beswick’s presentation included some suggestions. Among other things, he recommended that audit committees have regular, timely, direct contact with auditors as well as a two-way dialogue with auditors. In addition, Beswick noted that audit committees should resolve any disputes between auditors and management.

For additional observations on the increasing focus on audit committees, read Linda L. Griggs’s August 2013 article prepared for the Practising Law Institute’s 45th Annual Institute on Securities Regulation, “The Evolving Responsibilities of Audit Committees”.