Fewer than one-third of audit committees implement a majority of practices that lead to higher ratings of the financial audit process, according to a report by J.D. Power and Associates.
While audit committees have improved compared to 2003, significant challenges remain, according to the 2004 Audit Committee Best Practices Report, based on interviews with 1,007 audit committee chairs and 944 chief financial officers.
According to J.D. Powers and Associates, examples of best practices that are directly linked to higher performance ratings of audit firms and increased confidence in the accounting industry include more frequent meetings between the audit committee and the external auditor. According to the report, external auditors who meet with the audit chair seven or more times per year receive the highest ratings. Most audit committees meet five or more times annually with the external auditor. J.D. Powers noted that audit committees of both small and large companies are meeting more frequently compared to 2003.
Excluding management from some meetings also increases ratings with the audit process. The report found that the majority of companies that meet four to six times annually frequently exclude management.
Audit committee chairs who spend between 16 and 20 hours annually attending audit committee meetings rate the audit experience higher than those spending fewer than 16 hours. Conversely, ratings begin to drop once the number of hours attending audit committee meetings exceeds 20, the report said.
Ron Conlin, partner at J.D. Power and Associates, noted that when applied, best practices result in higher ratings of the audit process, which directly relates to confidence in the accounting industry. More than 86 percent of respondents who gave high ratings to their audit firms also said that they are extremely or very confident in the accounting industry, while only 31 percent of those who give their audit firms low ratings record the same levels of confidence in the industry, Conlin noted.
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