As the audit committee chair of a Fortune 100 company recently observed, “After you’ve been through a force 10 gale, you spend a lot of time checking your sails.” To be sure, the past 12 months, like the 12 months before that, have continued to put companies, boards and audit committees to the test. And the year ahead in business, governance and financial reporting is unlikely to be smooth sailing.
The results of our 2010 KPMG/NACD Public Company Audit Committee Member Survey make clear that the pressures on companies to grow are shaping audit committee agendas. Every audit committee should review the detailed survey results (visit auditcommitteeinstitute.com), but here’s a snapshot of what our survey found—and where most audit committees are focusing their efforts.
Top concerns for the year ahead. Risk, public policy initiatives, financial statement issues, IT risk, liquidity/cash flow and internal controls will dominate audit committee agendas in the months ahead.
Financial reporting and controls. Economic uncertainty and pressures to grow—or make do with less—continue to drive a sharper focus on financial statement issues, key performance indicators (KPIs), and stresses on financial reporting and compliance systems. Our survey found that audit committees are continuing to pay close attention to:
- Fair value, asset impairments, pension obligations, tax valuation allowances and other ongoing financial statement issues affected by economic conditions
- Earnings, cash flow, liquidity positions and other KPIs
- The impact of recession-related cost reductions—particularly on talent/training, internal controls and fraud risk
- Alignment of strategy, risks, controls, compliance and incentives—particularly in the context of strategic growth initiatives
- The company’s ability to identify emerging risks and understand the “velocity” of risk events.
Financial communications and disclosures. From earnings guidance and press releases, to the MD&A and other disclosures, to the impact of economic conditions on the company’s financial statements, all financial communications—and the financial reporting system behind them—are getting focused attention. Interestingly, however, only 59 percent of respondents said their audit committee drills down and reviews the key assumptions underlying management’s material accounting judgments and estimates “to a great extent.”
Transparency and information quality. Given the uncertain economic and political environment today, and the increasing complexity and globalization of business, audit committees are focused on ensuring good internal transparency and quality information—the “backbone” of the company’s decision making. Our survey finds audit committees particularly focused on:
- The timeliness and the accuracy of financial forecast information
- Whether management is focused on the right KPIs
- Information quality in general—and specifically the significant risks facing the business, including IT and tax risk
- Monitoring the company’s ethical culture and tone at the top.
Risk management. In light of the tremendous focus on risk management and risk oversight by companies, boards, investors and regulators, audit committees are rethinking their role in the oversight of risk: Should they be focused primarily on financial reporting and related risks? Or should their role be more expansive, involving other substantive areas of risk—or, perhaps, oversight of the company’s risk management processes? Responsibility for oversight of “strategic risks” appears to be shifting to the full board, while the risk-oversight responsibilities of audit committees still vary widely. Survey respondents cited “understanding the velocity of risk events” as the top risk management challenge facing their company.
The CFO, finance team and auditors. Pressures on the CFO and finance team and the adequacy of their resources, including budget, people and skills, are clearly areas of audit committee focus. Notably, many survey respondents said the committee has not established clear performance objectives for evaluating the CFO, or a formal CFO succession plan.
Audit committee performance. Respondents said their effectiveness would be most improved by better information, agendas that are more focused on key issues facing the business (versus “checklist” items) and a deeper understanding of the company’s strategy and related risks.
Mary Pat McCarthy is U.S. vice chair, KPMG LLP, and executive director of KPMG’s Audit Committee Institute.