3 minute read 26 Apr 2019
Audit Committee meeting

How audit committees can improve the performance of private companies

By

Randall Tavierne

EY Global Assurance Private Client Services Leader

Global leader helping entrepreneurs and private companies realize their ambitions. Frequent speaker on the high-growth market.

3 minute read 26 Apr 2019

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Adding an audit committee to a business can be a way of demonstrating transparency, ethical financial behavior and good business management.

Large listed companies have long been the focus of investors and media outlets across the world. The size and clout of these companies are often regarded as a benchmark for the health of global financial and industrial markets, and therefore, their performance is heavily scrutinized.

It has been accepted, but often undervalued, that private companies — those that are family-owned, founder-managed, private equity-backed, or simply not listed — can support economies in a robust way that their listed peers sometimes cannot. While international private companies are affected by the same market forces as listed companies, there are many that are either more specialized or more localized and can, therefore, be insulated from the worst of global economic change.

Many global markets are in a growth period currently, but international trade wars are breaking out, and corporate performance in many sectors is not what it has been in the past. This has prompted many governments to offer renewed support to private companies as the main drivers of growth. There is a heightened interest in private equity-backed or venture capital-backed companies and start-ups, as they are perceived as vehicles for quick growth, as well as advocates of overall innovation. While this attention is nice to have, it also comes with closer public interest and a wider investigation of the practices that are used to manage their businesses.

Those who create or run private companies are experts in their field, but sometimes lack a focus on financial governance and risk management. Introducing an audit committee would be one way to address this. It is something that private companies may not have seriously considered before, but should.

Rather than constraining a company’s performance, audit committees have been shown to improve the rigor of governance measures, protect current and future growth, and foster transparency through independence.

Whatever your ambitions are, an independent and consistent view of the company’s health is always going to be important.

Improving governance

Audit committees can provide confidence to internal management and external stakeholders by offering consistent support to the board through independent assessment of the company’s financial governance and risk management.

Protecting growth

Growth is essential for all companies, yet it must be controlled and sustainable. An audit committee can give internal management and external investors enhanced confidence in the financial stability of the business through effective internal controls and high-level oversight of potential risks.

Fostering independence

Whatever the company’s ambitions are — whether an Initial Public Offering (IPO) or other forms of outside investment — an independent and consistent view of the company’s health is always going to be important. Preparing for additional scrutiny by adopting listed-company practices in advance has a value that cannot be overstated. Even if an IPO is not on the horizon as an exit strategy, the uninterrupted improvement and growth of a private company will continue to be important in the increasingly stiff competition for market share.

Futureproofing

This article is not a definitive statement that all private companies should have an audit committee. It is simply an addition to the discussion about good corporate governance. We live in a world that demands accountability — a time where movements like ethical capitalism, corporate bonus examination and populism are gaining traction. Although these three ideologies are in no way related, they all demand heightened proof of information and “sense-checking.”

Adding an audit committee to a private business can be a way of demonstrating transparency, ethical financial behavior and good business management. Creative start-ups won’t stay small forever, and when they grow to a point that attracts scrutiny by the public and media, it would be practical to be able to demonstrate that an independent, internal financial process has been followed for years.

Summary

Finance teams today have access to more data than ever before. In order to harness the power of that data to create value-driven reporting, they should utilize the power of the latest technological advances and build trust in their data analytics. This digital transformation of reporting also necessitates finance leaders to think differently about the talent profiles and skill sets of the people they recruit for their teams.

About this article

By

Randall Tavierne

EY Global Assurance Private Client Services Leader

Global leader helping entrepreneurs and private companies realize their ambitions. Frequent speaker on the high-growth market.