more-arw search

Interacting With Auditors Amid Relationship Debate

Businesses and auditors should have a trusting, but professional, relationship

Regulators have had the relationships between auditing firms and private companies squarely in their sights in recent years, with some calling for a limit on how long the auditor relationship can last.


Regulators have had the relationships between auditing firms and private companies squarely in their sights in recent years, with some calling for a limit on how long the auditor relationship can last.

In August 2011, the Public Company Accounting Oversight Board issued a concept release seeking public feedback on how to improve auditor independence and make their findings more credible in light of the financial crisis. While there has yet to be a ruling on how many years a company can work with a single auditor, there is plenty that organizations can do to build productive relationships that uncover any reporting issues in the meantime.

Win-win situations

Accounting, audit and advisory firm KPMG defines the ideal working relationship between a business and its auditor as trusting and one that seeks a middle ground between being too close to challenge management and having too much distance to build a "productive working relationship."

"Audit committee members and chairmen are very aware of our responsibility to ensure that when the company publishes its reports and accounts there is good quality information, and information that has been properly tested," stated Ann Godbehere, chair of the audit committees for Rio Tinto, Atrium Underwriting Group, Ariel Group and Prudential. She also noted that it's the committee chairman's duty to ensure the audit team can work without undue pressure from the company's management.

To that end, communication is very important, KPMG notes. Be sure the discussion is always constructive and that the CFO and/or CEO are engaged in the process. Timothy Copnell, the founder of KPMG's U.K. Audit Committee Institute, noted that it can be helpful to have private sessions between the auditor and the audit committee. In these discussions, both parties may benefit from having more freedom to cover the internal audit function, how management approaches financial reporting, whether there are adequate resources in financial management and more, he said.

Building trust

How can both parties engender trust in the company-auditor relationship? Being honest, transparent and immediately addressing issues as they arise can lay the foundation for a healthy, productive relationship.

KPMG also warns to be on the lookout for red flags in the relationship. On the auditor side, businesses should stay alert for signals that the auditor doesn't have knowledge about the sector or the company itself, that they are too relaxed or complacent about the job, and that there is significant churn among senior members on the audit team.

Likewise, there are warning signs for auditors to look out for in assessing the board's attitude. If they are constantly trying to slash the audit fees, take an "intractable stance on issues," or if the executives seem "dismissive" about the process or financial reporting in general, auditors should proceed with caution.

Go medieval

As the Financial Times reports, the U.K.'s accountancy and corporate governance regulator, the Financial Reporting Council, recently called on auditors to envision that they are "loyal medieval servants" in order to approach corporate accounts with a healthy dose of skepticism.

The modern audit has its roots in the 14th century, when manor houses' reliable servants would be asked how fellow servants had managed the master's assets, the newspaper explains. These trustworthy servants would have to ask tough questions and get evidence to ensure the others were telling the truth.

"If you go into that mindset, you should be able to make the right judgments," said Marek Grabowski, FRC director of audit policy, as quoted by the news outlet. Grabowski also called skepticism "the absolute cornerstone of an effective audit."