Rather than relying solely on year-end questionnaires, audit committees may be better served to initiate an ongoing approach for seeking candid feedback.
Forward View by Tapestry Networks
As audit committees respond to pressures to expand their agendas to tackle new subjects (such as IT risk), they also face increased scrutiny from regulators such as the Public Company Accounting Oversight Board and from some investors who have expressed significant concern recently about the role and quality of the audit.
Leading audit chairs recognize that the time is right to look for ways to enhance the audit committee’s performance and help reassure stakeholders.
How do audit committees evaluate and improve performance?
Traditionally, the year-end board evaluation process is the primary means by which audit committees gauge their effectiveness and determine how to make improvements. Yet surprisingly few audit chairs view the annual self-assessment questionnaires used by many companies as an effective way to improve committee performance, especially if used without the benefit of timely feedback.
One audit chair said, “In general, the committee assessments have become too rote … everyone just checks the boxes.” Another added, “[The questionnaires] come out at the end of the year as part of a huge package — the CEO assessment, peer assessments, etc. The more time you spend on these, the more you just want to check the boxes as opposed to turning it into a valuable discussion tool.”
Audit chairs who have noted positive outcomes from performance evaluations recommend employing a mix of approaches:
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Clearly define what is meant by “success”
In a dynamic environment, agreeing on what constitutes a high-performing audit committee is a challenge. Some audit chairs define success as a “smooth audit” without any reporting surprises throughout the year. Others suggest success is “if we have the information we need to tackle the right issues.” Audit chairs agree that setting objectives for performance is critical. Many use the audit committee charter as a guide for doing so. It is also important that objectives are tracked throughout the year.
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Seek ongoing feedback from management and external auditors
Audit committee members routinely report that the most effective means to increase audit committee effectiveness is to seek feedback through regularly scheduled executive sessions between the audit chair and members of management and, separately, with the external auditors. These sessions should allow issues to be addressed candidly and then acted upon quickly. One audit chair explained, “I get input on our agenda like whether we are covering the right things; and together we can identify where we need some kind of tutorial.” Other members reflected that this approach allows feedback to occur in the “flow of work,” which allows for more substantive discussions on issues.
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Prioritize committee performance issues to discuss
Rather than using lengthy, process-heavy questionnaires or third parties, many audit chairs use an informal process. One chair noted, “I circulate some questions to committee members and ask them to answer the questions but also to make comments. They can do it anonymously or for attribution. I look at the feedback and end up with two or three things that we need to talk about.”
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Evaluate via lead director interviews
Several audit chairs suggested the lead director on the board should hold individual discussions with members of the audit committee and the full board to gather feedback. A lead director described an effective process: “I personally went around and interviewed directors about two things: first, issues we weren’t getting at as a board, and second, how can we make the board more efficient?”
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Readjust the approach every few years
An audit chair also noted the value of external experts when doing so: “We brought in someone with fresh perspective who had a goal mentality and was familiar with best practices. This person can lead the assessment and provide a view on how to improve our committee performance.”
Forward View is prepared by Tapestry Networks. Views expressed by Tapestry Networks are those of Tapestry Networks and not necessarily of any Ernst & Young member firm. Tapestry Networks convenes seven audit committee networks sponsored by Ernst & Young that collectively consist of nearly 150 individuals, who chair more than 200 audit committees and sit on over 300 boards at some of the world’s most admired companies. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Ltd., each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm in the US.
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