BoardMatters Quarterly, June 2012
going beyond the ordinary
Questions for the audit committee to consider
- Do any members sit on other audit committees? If so, what leading practices can they share?
- How often does the audit committee meet with teams (e.g., IT, compliance, tax, internal audit), formally or informally, to better understand the risks and challenges the company faces?
- Are all board and audit committee members familiar with the accounting policies and procedures, and do they have access to, or regular interaction with, the independent auditor?
- If the company has operations in other locations (e.g., foreign countries), should the audit committee or board consider meeting in those locations?
- Does the audit committee chair meet with the controller, chief accounting officer, internal auditor, and/or independent auditor before every audit committee meeting?
- Should the audit committee invite the entire board or C-suite to committee meetings?
Some boards have found it extremely valuable to have the independent auditor play a part in the orientation of each new board member.
Unique approaches to today's audit committee challenges
Many of today’s corporate boards are challenged with expanding agendas, shifting economic conditions and emerging risks. They also are under enormous pressure from regulators, investors and shareholders.
These challenges are particularly significant for audit committees, which also must oversee risk, the independent auditor and internal auditor, and the company’s accounting and financial reporting processes. To help meet some of the demands, some audit committees are thinking in unique and practical ways about managing agendas, improving transparency and identifying efficiencies.
Getting a hands-on perspective
First and foremost, the audit committee must have a thorough understanding of the business and the financial accounting policies and procedures. One way audit committees can better understand the financial reporting process is to have each committee member spend a day with the teams from internal audit, corporate accounting and the independent auditor.
During these meetings, the teams cover critical accounting and financial reporting topics to help the audit committee members understand the depth of their knowledge and their unique perspectives and insights into the company.
The audit committee is responsible for managing the relationship with the independent auditor and ensuring that the auditor conducts a high-quality audit. Establishing good communication and regular interaction can go a long way in helping both the auditor and the audit committee meet their responsibilities.
However, it’s important that the broader board also understands the role of the independent auditor. To that end, some boards have found it extremely valuable to have the auditor play a part in the orientation of each new board member.
This orientation gives new directors the opportunity to have one-on-one conversations with the auditor and better understand and ask questions about risk areas and critical accounting policies used to prepare the company’s financial statements.
For audit committees of global companies, having experience with foreign cultures and knowledge of international business matters can help members better understand and monitor the risks in distant locations. This experience is particularly important when it comes to emerging markets.
An increasing number of audit committees are conducting meetings in international locations where members gain firsthand knowledge of the market, meeting with local management and independent audit teams in those locations.
Managing the agenda and materials
With so many issues needing attention and sometimes competing priorities, audit committees are looking for more efficient ways to gather information quickly and accurately to focus the agenda and make meetings more productive.
Many audit committees find it beneficial to invite the CFO‘s direct reports to present, at least annually, to the committee on risks, emerging trends and the challenges they face. Having these individuals prepare and distribute their reports in advance is even more helpful, so that more time can be spent asking and answering questions.
Similarly, some audit committees ask business unit leaders to make presentations on risks specific to their areas, such as tax, IT, people or operations. These presentations allow the audit committee to develop a relationship with the CFO and business unit leaders, provide the committee with insight into the “bench strength” in these functional areas and allow the committee to better understand future succession needs.
Internal audit helps identify high-risk priorities for the audit committee. For example, some internal audit directors have “high-risk reporting” categories, and if certain areas are identified, the appropriate team or responsible individual presents a responsive action plan to the audit committee.
What the audit committee chair can do
The audit committee chair plays an important role, not only in leading the committee but also in setting the tone of the relationship with management and the independent auditor.
Some chairs develop a personal mentoring relationship with the CEO and/or the CFO and have regular one-on-one meetings with those individuals. Other chairs meet individually with the controller, the chief accounting officer and the independent auditor before every audit committee meeting, not just occasionally.
Further, some audit committee chairs like to meet with departments and teams that might not normally present to the audit committee, such as marketing. These sessions can provide valuable insight into the company’s operations, products and strategies — all of which can help the audit committee in its broader governance role.
To improve transparency, many audit committee chairs invite the entire board, the chairman and, in some cases, the CEO to each meeting. Having an open-door policy increases the flow of information and ultimately may provide additional input and greater perspective on certain issues.
Working with the CFO
The CFO plays a critical role in the financial reporting process. Some CFOs have enhanced open dialogue with committee members by preparing a list of new disclosures for discussion with the audit committee. Some CFOs also meet regularly with the audit committee chair to review the risks to which the company is exposed and make this a regular topic of discussion with the entire audit committee.
At some companies, controllers create a summary review document describing the critical accounting estimates used in the financial statements. The CFO reviews the summary and sends it to the independent auditor before each quarterly meeting.
With each of these examples, the CFO helps to focus the audit committee’s attention on specific risks the company faces and the appropriate accounting for and disclosure of those matters.
Applying what works
Serving on an audit committee requires a significant time commitment and involves taking on serious responsibilities. Considering and applying some of the practices summarized here may help audit committees deal with current issues and be better prepared for future challenges.