Are You Making the Most of Your Audit Committee
Author:
Peter G. Cowap
Peter Cowap explores the dynamics to be considered in ensuring companies get the most out of their audit committees in an increasingly challenging landscape.
Ultimately any Audit Committee (AC) must be primarily concerned with helping the enterprise sustain its performance objectives over the long haul. The AC can act as a beacon helping guide the enterprise through challenging times and contributingtowards achieving successful outcomes that protect and enhance reputation.
Whilst occupying a crucially independent and objective ‘supervisory and oversight’ role central to the proper governance of the enterprise, the AC is rightfully and properly supportive of the CEO/CFO and their senior management team in delivering the enterprise’s core strategic objectives.
The core role of the AC is to provide a focus and perspective on reducing the downside of risk. This requires experience, skill and judgment indetermining risk appetite, especially when senior management are concerned with growth and managing the ‘upside’ of risk. However, adopting a more holistic picture of risk that properly aligns risks with corporate objectives strengthens the ability of the enterprise to adapt to changing circumstances whilst fully leveraging the collective talents of the AC to help sustain value.
Effective ACs will be actively involved in meaningful discussions on a riskaware and informed basis anchored upon sound mechanisms an processes. This allows for richer and more intuitive discussions with senior management. Good information on risk, full and fluid information flow and regular and ongoing dialogue and communication between nonexecutives and senior management is required to achieve this. Clearly, the AC will not rely solely upon business managers to obtain the best and most reliable information – both the internal and external auditors will be influential in helping the AC establish confidence in the integrity of the information being provided to it. Equally, the CFO will play a pivotal role in helping establish the basis for the AC’s conclusions on specific issues. Audit Committee performance is enhanced by candid, robust relationships.
AC performance can certainly be enhanced where the AC Chair enjoys a candid and credible relationship, respectively with the CFO, the head of internal audit and the audit engagement partner. It is these four key players who should collaboratively help set the AC agenda, the tone for meetings, and the relationships with senior management. They establish the ‘ways of working’ – how and what should be reported, how meetings and presentations should run (especially those that involve management updates) and the type of contact the AC Chair requires outside of the regular AC meeting cycle. The success of a formal AC meeting is often a measure of how effective the ‘premeet’ has been and reflects the broader, more informal, real-time relationship enjoyed between these four.
The full spectrum of the AC’s remit can appear daunting when, in any one meeting, there may be a need to cover key financial reporting judgements and estimates, disclosures, internal controls and risk management, the signing-off of financial statements and pro-actively identifying emerging issues – quite an array! The challenge is to get the right and trusted processes, tools, people, mechanisms and risk management framework properly positioned to support and address this ever-evolving profile within the enterprise. This clearly requires a riskintelligent approach where the sources of assurance and accountability are clearly mapped within the enterprise such that the AC can effectively leverage its experience and efforts, thereby optimising its contribution to the holistic ‘what and how’ of business performance management.
Finally, in unlocking the ‘sweet-spot’ in the relationship between risk intelligence and the creation andsustainability of shareholder value, the AC must examine its own performance; for many ACs the annual self-assessment process has probably not been hugely satisfactory but it is essential nevertheless. Buy-in to this process from all AC members is a sine qua non to authentic engagement with all relevant stakeholders – and so truly gets the most out of your AC.
(c) Institute of Chartered Accountants in Ireland 2008.