Audit committee chairs recognize that the demands of serving on an audit committee have expanded significantly and show no signs of abating.
Forward View by Tapestry Networks
Nearly a decade ago, the Sarbanes-Oxley Act significantly expanded the duties and obligations of audit committees, leading to a complete overhaul of how many audit committees operate and select members.
More recently, financial and economic turmoil in the markets created new challenges for audit committees, which are faced with an ever-expanding agenda as issues such as enterprise risk management and information technology demand more oversight.
One audit chair recently described today’s audit committee this way, “The audit committee is now viewed as a powerful, important committee [of the board] that can scale issues of any kind. It has become the workhorse of the board. It meets more often, so it has fresher data … and it has more familiarity with management, so it’s able to make quicker judgments on things.”
The audit committee of the future: five things to look for
Across our audit committee networks, audit chairs are talking about how trends, such as technological change, expansion into emerging markets and pressures to create sustainable businesses are shaping their committees’ composition, priorities and use of resources.
Drawing on these insights, Tapestry Networks identified the following ways in which audit committees will evolve over the next three to five years and beyond.
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Public company boards and audit committees will undergo a transformation.
As companies face more complex and more global issues, boards will evolve too. They will become increasingly diverse to counter concern that non-diverse boards may be susceptible to groupthink.
Additionally, companies will cast a wider net when recruiting directors, especially given the challenges directors face when simultaneously holding down multiple board roles and/or an executive role. Finally, specialization will likely become more critical to boards and audit committees than it is today, particularly on issues such as information technology and international market risks.
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The focus on shareholders will shift to include stakeholders, providing an additional lens through which risks will be considered.
American boards have traditionally focused on the shareholder as the primary stakeholder; however, some directors are starting to question this approach. They believe boards will broaden their focus to include other stakeholders, particularly as companies expand into markets in which employee and community needs command greater attention than they do in the United States.
Issues such as sustainability may take on greater importance, and US companies will be asked (possibly required) to report on environmental, social and ethical issues in a more comprehensive way. Oversight of reporting on these matters will likely find its way onto the audit committee agenda, especially as disclosure requirements increase and the risks of miscommunication to stakeholders become more evident.
At the same time, shareholders will be under pressure from regulators and the investing public to increase their interaction with boards and audit committees.
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Audit committee agendas will focus more on strategic issues, less on compliance.
Audit committees recognize the need for diligent oversight of regulatory compliance and financial controls, yet question the value of “checking boxes.”
Consent agendas, pre-reading with limited presentation and other techniques to fulfill routine oversight and compliance responsibilities will be used to make committees run more efficiently.
This will allow additional time on the audit committee’s (and the board’s) agenda for deep dives into key risks, the evaluation and sometimes mentoring of senior and high-potential executives, as well as discussions about strategic priorities. This will require audit committees to be more flexible as they deal with unscheduled matters and urgent issues.
This shift is already reflected in the changing role of audit chairs, who often meet more frequently with members of management and the external auditor between audit committee meetings to ensure continuity on critical issues.
A likely challenge that many audit chairs fear is that audit committees will be blown off course by the need to launch investigations into whistle-blower complaints incentivized by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
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Financial reporting is evolving, begging the question of whether audit committees should consider a broader oversight role.
Investors seeking to understand a company’s health and future prospects are relying more on qualitative information, such as management’s discussion and analysis. This is especially true as financial statements and accounting have become more complex.
Meanwhile, companies are using real- time communication tools and social media to communicate with financial stakeholders, at an alarmingly fast pace. Some investors believe the move to XBRL will transform how the market uses financial information.
These shifts will give rise to broader audit committee oversight of financial communications that are organized less around the quarterly filings schedule and more on ensuring a comprehensive, fair and understandable representation of company performance to the market throughout the year.
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Audit committees will use more resources given the new demands.
Audit committee chairs talk frequently about their reliance on the CFO, internal audit and the external auditor, as well as the need for increasingly sophisticated insight from these and other experts on matters relevant to the audit committee. Many also note the difficulty of staying on top of issues from outside the company, such as changing regulations, technology trends and market- specific issues.
Some have started to engage independent advisory councils to provide guidance to management and the board. Others use third- party advisors on an ad hoc basis to draw on specific expertise related to a pending transaction or an annual strategy or risk review. One audit chair recently suggested MBAs could be hired to do postgraduate clerkships for boards just as they do for private equity-owned companies.
Audit committee chairs recognize that the demands of serving on an audit committee have expanded significantly and show no signs of abating. Yet they also recognize the value that they provide as the committee with the broadest set of responsibilities.
As companies continue to push themselves to adapt in a volatile and complex economic environment, audit committees and boards will use a wider variety of resources and tactics to focus more on strategic issues than on compliance-related activities. They also will become more flexible in their approach to oversight in order to meet the demands of today’s capital markets.
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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