There are certain audit committee chairpersons and audit committees who demonstrate good practices to improve governance and ensure the integrity of financial reporting. These can be put down as easy habits that could be implemented by all members of audit committees. I have noted the following 5 basic habits that are practiced by members of audit committees to increase their effectiveness;
1. They Understand the business and are also Skeptical
Make an effort to understand the business of the entity. For example, 70 percent of the General Electric audit committee’s time is spent on the job—and this is not just the chair, it’s the full committee’s time—is spent outside the building, visiting GE locations, going out and seeing things and talking to people on their own, in their own offices and workplaces. The good directors ask questions to verify inconsistencies and challenge management on risks and outliers, based on their understanding. They’re skeptical about management not reporting any matters of concern or defending their position against findings by internal or external auditors. They ask incisive questions.By exercising their right to seek explanations and constructively challenging the CFO, the audit committee and its chair are instrumental in enhancing the effectiveness of governance.
2. They Support the Internal Auditor
Making the head of internal audit to report directly to the audit committee chairperson gives it the right recognition and independence. Good audit committees are responsible to evaluate the performance of the internal auditor and to provide appropriate resources for them to function effectively. They are extremely attentive to internal audit findings and to any corrective measures and action plans implemented by management. In certain companies the audit committee chair is actively engaged to see what the internal audit is working on, what they’re finding, and trends they’re observing and help in the probing.
3. They have a Non negotiable Culture around non compliance
Control consciousness and implementation are much better when the audit committee chair and members take serious note of non compliances. When the accountants know that financial misrepresentation is not tolerated then they try less to justify misreporting and therefore integrity of the financial reporting process improves.
4. They are alert for Fraud Indicators
When management is defensive or unable to provide plausible explanations good audit committee members probe to understand why. They’re alert to external information about life style changes or previous employment references or unethical behaviors of key management persons. When insufficient time is given for audit committee activities, alert directors challenge management to get the right attention.
5. They hold management Accountable.
Effective audit committee chairs actively follow up with management and the CFO about quarterly financials and challenge them on earnings management and inconsistency of accounting estimates and judgment. They monitor management’s action plans and question on delayed implementation of remediation plans. Any feedback from the audit committee is considered in performance appraisals to further enhance the non negotiable stance taken by the audit committee.