Audit committees: Have done well, but could do better

THE HOUSE of Lords inquiry into audit turned the spotlight on audit committees, and the findings are out next week.

Experts were quizzed about the role of audit committees, but some have questioned whether they should use their current powers more fully before demanding more.

Chaired by Lord MacGregor, former cabinet minister under Margaret Thatcher, the inquiry scrutinised issues like Big Four domination and the part auditors played in the financial crisis.

The role of audit committees was just one of many focuses, but in the context of growing debate over risk management, it is coming under increasing scrutiny.

One shortcoming repeatedly laid at the feet of audit committees is a lack of transparency and disclosure. Experts have complained they are more concerned with box-ticking and task-based reporting than explaining how they discharge their duties.

Ernst & Young’s submission to the House of Lords inquiry pushed for audit committees to report on discussions with management and auditors, saying this would strengthen their role.

However, the Financial Reporting Council’s Effective Company Stewardship paper already makes this recommendation, calling on audit committees to make fuller disclosures and have external auditors examine their quality.

With this provision already it place, it seems audit committees have the guidelines to do better, but are making mixed progress towards the goal of improved transparency.

Ed Davey, employment minister at the department for business, agreed. In his evidence to the House of Lords, he called for the FRC code to be made mandatory, saying: “I am very much attracted by that approach.”

But tighter legislation might not address the problem of effective communication with investors and stakeholders.

Tim Copnell, director of the Audit Committee Institute at KPMG, said companies should keep this group in mind when considering the role of audit committees.

He argued better communication and transparency are indivisible, saying improved disclosure would boost understanding about the company’s position, as well as the role of the audit committee.

Copnell is one of those calling for enhanced audit committee effectiveness rather than greater responsibility, saying reporting is “often not done very well”. Indeed, better communication would arguably strengthen audit committees, forcing them to examine their own efficacy and look at outputs rather than inputs.

KPMG’s Audit Committee Institute is working to improve audit committee skills, and the ICAEW is developing good practice guidelines for communication between committees and external auditors.

However, this might not be enough, as some experts worry the capacity is lacking in many companies, saying extra training will not be enough to bridge the gap.

James Roberts, BDO audit partner, has warned against pushing smaller companies too hard when it comes to enhancing the role of audit committees.
He said a lack of resources and experience could place audit committee chairmen under extraordinary pressure, claiming this would increase the risk of poor performance.

Roberts said audit committees are desperately keen to share experiences and build capacity, but warned we must “think quite hard” about how far to broaden their role. He recommended any extension should first apply to listed firms only, and be applied to smaller companies after a period of adjustment.

Ex-Treasury member Lord Myners also called for audit committee capacity building, telling the House of Lords inquiry he favoured bank audit committees appointing a professional adviser to offer guidance on concepts and language.

The experts are agreed that audit committees need to become more effective.
Many point to examples of audit committees – Barclays was mentioned by more than one – striving for excellence, and all said the majority of are eager to boost their value.

The FRC’s financial stewardship paper already sets out recommendations for strengthening audit committees, and these have been widely welcomed by experts.

But capacity appears to be an issue, with boards lacking the resources and expertise to effectively discharge their duties – and tell stakeholders how they did it.

So is enhancing audit committees’ role like asking them to run before they can walk? The improvements stakeholders are calling for have been on the wish list for years, so boards might want to get the basics right before shouldering a greater load.