Oversight of the Independent Auditor

Boards rely on independent auditors to give an unbiased opinion on the company’s financial statements. The audit committee plays a key role in ensuring the quality of work done by the independent auditor, especially in public companies. This Director FAQ provides a general overview of the oversight role of the audit committee in relation to role of the independent auditor in public companies, followed by specifics on this oversight role with respect to hiring and compensating the independent auditor and reviewing the auditor’s work. Closing sections cover the use of independent auditors by private companies and nonprofits.

Q: How can directors effectively oversee the work of the independent auditor?

A: This memo covers board oversight of the independent auditor through the following topics: 

1. The board and the independent auditor: an overview
2. Practicalities of working with an audit firm
3. Independent audits in private companies
4. Independent audits in nonprofits
5. Resources and key questions

1. The board and the independent auditor: an overview
As fiduciaries representing the interests of shareholders and other stakeholders, corporate directors oversee a company’s financial performance, among other areas. In addition, because a key indicator of financial performance is the audited financial statement, directors oversee the work of the company’s independent—or, external—auditor, playing a key role in selecting, evaluating, and compensating the audit firm. While these responsibilities can apply to companies of every type, they are especially critical in public companies, which must meet certain requirements related to auditor oversight, which generally is accomplished through the work of an independent audit committee. Among other duties, audit committees oversee both the external auditor (typically called the “auditor”) and the company’s internal control system, which may include an audit function accomplished by one or more employees, referred to as “internal auditors.”