Sri Lanka Institute of Directors organized a discussion on 14 July 2015, moderated by me, to discuss audit committee’s role in improving governance in companies. The discussion was structured around KPMGs global audit committee survey released in 2015 covering the following four key areas;
1 AC composition and expertise
2 AC effectiveness, including quality of risk information.
3 AC agenda and workload
4 AC working mechanics, challenges and concerns
A summary of the comments and discussion are given below;
Audit Committee Composition and Expertise
‘KPMGs 2015 Global Audit Committee Survey’ finds the audit committee member job has become more challenging. By and large, the audit committee members surveyed continue to express confidence in their oversight of the company’s financial reporting and audit quality. But about 74% – said the time required to carry out their responsibilities has increased significantly. Furthermore, about half of those surveyed (51 percent) said the job continues to grow more difficult each passing year, given the committee’s time and expertise restraints.
It is a general view that audit committee members need to bring more than just narrow financial and auditing knowledge to the table, if they are going to add value to the board discussions and the audit committee. These skill sets need to be matched with strategic thinking and sound business knowledge. This means that companies need to look beyond financial and auditing professionals to get the mix of skills and experience needed for the audit committee to operate effectively.
Audit Committee Effectiveness
Stewardship refers to the directors’ role as guardians of the company’s assets. The shareowners, through the board, delegate authority to management and trust the board to act on their behalf. This separation of the ownership and control functions within a company inevitably leads to the managers being made responsible for the spending of other people’s money. For an effective relationship to be maintained between the providers of money and company managers, high levels of trust must exist between both. There’s inadequate attention paid to CFO succession, locally and nomination committees should ensure the skills gaps in the board and the audit committee are properly addressed.
In ‘KPMGs 2015 Global Audit Committee Survey’ the respondents cited ongoing opportunities for improvement of audit committee functions in critical areas, such as CFO succession planning, getting more insight from external auditors, improving the quality of risk information and better leveraging internal audit as a vital resource for the audit committee.
Audit Committee Agenda & Workload
‘KPMGs 2015 Global Audit Committee Survey’ finds more corporate boards are reallocating risk oversight responsibilities among the full board and its committees. Further, when asked what would best improve overall effectiveness, 43% of the respondents said a better understanding of the business would be helpful; 38% indicated a greater diversity of thinking, background, perspectives, and experiences; and 34% advocated more “white space” time on the agenda for open dialogue.
The core functions for all audit committees are oversight of the integrity of the financial reporting process and reporting to the board. However, their area of oversight has increased and ranges from; financial reporting, internal controls, fraud, risk management to internal and external audit processes. There is also a feeling that, in handing new responsibilities to the audit committee, there is a risk of it becoming so burdened that it is unable to carry out its core functions effectively. There are benefits of having a separate risk management committee to oversee the enterprise risk aspect but audit committee should have a process for oversight. Expertise in legal affairs and technology would be a definite advantage when forming an audit committee. Further, the members should undergo regular training and their performance should be annually evaluated to improve effort of members.
New Challenges & Audit Committee Working Mechanics
‘KPMGs 2015 Global Audit Committee Survey’ finds that the top four risks audit committees said pose the greatest challenges for their company have carried over from the prior year: economic and political uncertainty and volatility (52%), regulation and the impact of public policy initiatives (47 %), operational risk (30%), and cybersecurity (16%). Clearly, a struggling economy, geopolitical flare-ups, and major cyber breaches have intensified the spotlight on these four issues. But many audit committees are also noting a growing trend of agenda overload.
There is strong consensus globally about the role of the audit committee, which is seen as a vital institution in assisting the board of directors in enhancing the transparency and integrity of financial reporting. Audit committee chairmen recognise and embrace the role and function they hold within this environment. Despite the overload, overseeing processes for prevention of fraud, whistle blowing and cyber security are of utmost importance. An assertive CFO is also key to improving compliance with finance policies and contributing to the effectiveness of audit committee discussions. A monthly dashboard with key risk indicators presented to the committee will improve understanding of business and risks and help in the discussion of mitigation.