On running an audit committee when the auditor is new to the firm

There is a particular moment in the life of an audit committee, which is the first year of a new external auditor, and it is harder than most chairs admit. The committee has spent years working with one firm. It has rhythms with that firm. It has shared assumptions, shared shortcuts, shared language. The new auditor does not have any of that. The first year is partly a real audit and partly a learning exercise on both sides.

The chair's job in that year is to manage three things at once, and they are in slight tension.

The first is to give the new auditor enough room to do a thorough job. New auditors are looking for things their predecessor may have missed, and that is the point of changing auditors in the first place. A chair who interrupts the new firm's first audit with 'the previous firm never asked about that' is undermining the only useful outcome of the change. The new questions are the value. Let them be asked.

The second is to protect the management team from being audited twice. New auditors sometimes go too far on a fresh audit, especially if the senior partner is making a name for the relationship. The chair has to be willing to push back when the audit becomes about demonstrating thoroughness rather than evidencing risk. The test I use is whether the auditor's request is proportionate to the materiality of the item. If a request requires a week of finance team work to answer a question the materiality threshold would not pick up, the chair should ask the auditor to confirm the proportionality in writing. The exchange is usually enough to recalibrate the scope.

The third, which is the hardest, is to manage the audit committee itself. Members of the committee who have worked with the previous auditor for years often have an unspoken loyalty. They do not enjoy the new firm asking questions the previous firm did not. The chair has to model the right disposition, which is curious about the new questions and supportive of the new partner's right to ask them. A committee that closes ranks against the new auditor in the first year is a committee that has not understood why the change was made.

There is also a practical sequencing question. The first year of a new auditor is not the year to schedule major accounting policy changes if they can be deferred. A change of accounting policy laid on top of a change of auditor doubles the burden on the finance team and increases the chance of mistakes. If a change has to happen anyway, the chair should make sure the audit timetable is built with a margin that does not exist in a normal year.

By the second year, the new auditor knows the firm. The committee knows the new auditor. The work returns to a normal cadence. The first year, properly run, is uncomfortable in the right way. It produces questions that the prior cadence had buried. It also produces a stronger committee, because the discomfort of being asked something new is the discomfort that keeps governance honest.

My working rule is that an audit committee chair should expect the first year of a new auditor to take 30 percent more of their time than a steady-state year. If the chair is not making that time available, the firm is going to feel the audit instead. The chair's calendar is the cheaper solution.