Auditing

Best Practices Elude Most Audit Committees

The corporate accounting watchdogs still wrangle with how best to instill confidence.
Stephen TaubApril 2, 2004

Nearly two years after the passage of the Sarbanes-Oxley Act, just 20 percent of audit committees have adopted best practices for the financial audit process, says a new survey from J.D. Power Associates. That’s despite the regulatory microscope under which audit committees must now operate.

“Although 20 percent may seem low, it isn’t surprising considering that public companies continue to expand their learning curve in the challenging post-Sarbanes-Oxley environment,” noted Ron Conlin, a partner at J.D. Powers. Nevertheless, he asserted that audit committee performance continues to attract public and regulatory attention because corporate and accounting scandals have put a spotlight on the accounting industry, which makes the “perceptions and experiences of the newly empowered audit committees more important than ever.”

The report, based on interviews with 758 audit committee chairs and 900 CFOs, examines audit committee practices and confidence levels in the accounting industry. The research found that implementing certain best practices leads to higher ratings of the audit—and of auditor performance—which drives higher confidence in the accounting industry.

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J.D. Power offers these report findings and examples of best practices:

  • Communicating disputes directly between the auditor and the audit committee, rather than through management, improves performance ratings. Yet, currently 72 percent of audit committees learn about disagreements from management rather than directly from the auditor, according to the survey.
  • Audit committees that meet with external auditors seven or more times per year rate the performance of their external auditor significantly higher. However, on average, most audit committees meet with their external auditor just four to six times annually.
  • Audit satisfaction suffers when audit committee chairs spend more than 100 hours annually on other board and committee activities. According to the report, audit committee chairs currently spend an average of 51 to 150 hours annually on board-related activities, including preparation, meetings and conference calls.
  • Excluding management from some meetings increases audit chair confidence in the audit. The good news: The majority of audit committees conduct four to six meetings annually that exclude company management, says the research.

Interestingly, J.D. Power officials note that audit committees from two industries that are subject to a greater amount of regulation and scrutiny—financial services and energy/utilities—appear to do the best job of implementing best practices.