Audit committees tightening grip on boardroom agendas

While the new non-executive proposals this week for accountancy firms might
make the headlines, the real changes taking place are in corporate boardrooms,
where audit committees have tightened their grip on governance.

Two of the profession’s most senior and experienced personalities have told
Accountancy Age that audit committees are interrogating executives to an
unprecedented degree – and even taking charge of key tasks previously the
preserve of the chief executive, chairman or FD.

Andy Durant, senior managing director at FTI Consulting’s European
investigations and forensic accounting team, said he had experienced audit
committees leading internal fraud investigations. “There’s much more involvement
from the audit committees – I’ve been appointed directly by them,” he said.
“Boards aren’t just reporting into committees, they are directly involved in
directing the investigation. I’m seeing some very sharp cookies on these

However, he is against regulation to put audit committees in charge of fraud,
with the introduction of more red tape best avoided where possible. “I see this
[development] more as best practice – regulation leads to box ticking.”

A review of the composition of audit committees over the past two years has
seen “skill and insight brought to the table”, according to Les Clifford, head
of the CFO programme at Ernst & Young. The audit committee and board are now
acting more like a team, he believed. Finance experts with more current
experience in accounting standards, regulation and risk management are asking
“more rigorous questions” of boards.

They are demanding greater communication with the company’s auditors and
access to company information that is more relevant rather than receiving a
stack of board papers a couple of days before meeting up. “They want clear,
concise information – and in many committees there is greater communication.
Collectively they want to make sure they understand so they can ask the second
and third question,” said Clifford.

“They need sufficient time to challenge and review [business data] before [it
is published] to the public.”

KPMG’s Audit Committee Institute this week highlighted the importance of
timely information for members, in its ten- point checklist for 2010. (See list

The list also flagged up a focus on understanding the risks faced by the
businesses that have undertaken cost-cutting, to make sure business critical
processes and departments can still operate effectively.

Financial communication will also need to be reviewed, such as looking at its
narrative reporting and earnings guidance issuance.

Top ten dos for audit committees in 2010

1 Regain control of the audit committee agenda.

2 Understand the risks posed by cost reductions
made in response to the economic crisis.

3 Focus closely on all financial communications.

4 Continue to monitor fair value issues,
impairments and management’s assumptions underlying critical accounting

5 Rethink the audit committee’s role in risk

6 Make sure internal audit is properly focused and
fully utilised.

7 Prepare for the potential impact of key public
policy initiatives on compliance, risk and governance processes.

8 The economic crisis continues to put pressure on
compliance and anti-fraud programs. Be vigilant.

9 Help reduce the risk of misalignment as the
company undergoes change.

10 Take a fresh look at the audit committee’s
composition and leadership.

Related reading