Audit Committee Bulletin: October 2013
Call for stronger audit committees
This bulletin highlights the issues that audit committee chairs of leading companies are currently discussing with us.
Greater business challenges call for stronger audit committees
Audit committees have traditionally been comprised of people with deep finance and accounting expertise. But, in recent years, the business environment has become more complex and its role has expanded, leading many boards and audit committees to rethink the skills they need.
The audit committee’s remit now includes overseeing risk management, compliance and a series of emerging business risks in areas such as bribery and corruption and cybersecurity.
This increased responsibility includes a call by some regulators for “stronger audit committees” to oversee the regulatory and business risks that companies face.
Participants surveyed for our report, Greater business challenges call for stronger audit committees, identified diversity of culture, roles and experience as the most important elements of an effective audit committee.
What constitutes a stronger audit committee?
- Financial expertise: the committee needs a keen understanding of internal controls and experience in disclosure to the investment community.
- Accounting and auditing expertise: one of the most critical audit committee responsibilities is overseeing the internal and external auditors. The committee needs at least one member who has experience working with both functions, and someone who understands accounting rules and how to apply them to company-specific judgments.
- Leadership: the committee should include someone who has run a major organization. In particular, audit committees want people who have been CEOs and CFOs.
- Industry or sector knowledge: it's important to have members with industry knowledge — including an understanding of the regulatory and competitive environment.
Depending on the company's industry and risk profile, there are several "nice to have" characteristics of effective audit committees. These include technology expertise, significant international experience and legal and compliance expertise.
As the audit committee’s remit changes, director recruitment is becoming more difficult. Diversity quotas may constrain the available talent pool and the time commitment on audit committees is only increasing.
To find people with the skills and experience they require, boards are adapting their recruitment and induction procedures. They are considering alternative geographies and industries and using training methods that can bring new audit committee members up to speed faster. These range from informal mentorships to more structured training programs.
Many boards maintain matrices that identify the skills they need and how they are currently being met. Ideally, this will reveal gaps that need to be filled when audit committee members take on new board responsibilities or retire from the board.
To find a candidate who fits the ideal profile, the board will normally tap into the directors’ personal and professional networks and hire a recruitment firm. But in the future we may see a greater role for social media networking and technology tools, even for senior positions.
Questions for the audit committee:
- How are you reviewing the composition of your audit committee?
- How is the mix of skills, experiences and backgrounds you need changing?
- What are your most significant recruitment challenges?
- How might you need to adapt your board recruitment process?
- What are you doing to widen the pl of available candidates?
- How can you better support new audit committee members?