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The audit committee’s relationship with the General Counsel (GC) continues to deepen, perhaps not surprisingly given the scope and complexity of issues on the audit committee’s agenda—from the heavy volume of regulatory activity and demands for greater transparency, to the challenges of doing business and managing risk and compliance in a global environment.
Dennis T. Whalen
Indeed, audit committees and boards increasingly are looking to the GC not only as a technical legal adviser, but also as a business adviser with insights into key risks facing the business and as a corporate leader helping to set the tone and culture of the organization—in short, supporting “high performance with high integrity.”*
A recent KPMG Quarterly Audit Committee Webcast—featuring the GC of a leading international business and a seasoned audit committee chair—highlighted the GC’s evolving role and provided timely insights into the GC’s deepening relationship with the audit committee and board, including:
Engaging in the dialogue on risk and governance. From serving as an “earlywarning system” for the audit committee— particularly in identifying risks on the horizon—to helping assess the company’s overall governance and control environment, GCs are an increasingly important voice in the dialogue on risk and governance. About half of webcast survey respondents said their GC is “very engaged” in discussions on risk management and key risks facing the company,” and 36 percent said the GC is “somewhat engaged.”
Adding rigor and clarity to the disclosures process. The volume and complexity of disclosures, including the MD&A, continues to be a source of frustration for investors and boards alike. The GC can help the audit committee better understand the process used to determine the company’s disclosure obligations. “Do the disclosures tell the company’s story?” Half of the webcast listeners said their audit committee receives reports from management’s disclosure committee every quarter.
Coordinating compliance. Should the GC also serve as chief compliance officer (CCO)? Should the CCO report to the GC? While no one size fits all, webcast speakers noted that there is an ongoing debate as to whether the CCO should report directly to the CEO or to the GC (with unfiltered access to the board or audit committee in either case). They also emphasized the importance of coordinating the work of internal audit and the CCO—particularly on legal matters, such as FCPA compliance.
Preparing for an investigation—before something goes wrong. While having a clear plan and process in place— an “investigations framework”—on the front end, before something goes wrong has long been a best practice, the SEC’s whistle- blower bounty program and stepped-up enforcement of FCPA are prompting a sharper focus on “investigations readiness.” GCs play a pivotal role here, including assisting the audit committee in determining the criteria for the escalation of matters to the audit committee or board, and whether outside counsel or advisers are needed. “Do we have a credible plan in place that will yield an outcome beyond any question or reproach?”
Helping to shape agendas and improve information flow. As audit committees wrestle with heavy agendas and information overload, GCs—working with the CFO—can help bring more discipline and focus to the agenda-setting process and support the timeliness and quality of meeting materials. As one webcast speaker noted, a good GC will help narrow the “divide between data and information by bringing the salient issues to the surface.”
A key challenge for the GC is maintaining independence—serving as a member of the management team, while at the same time being willing to say no when necessary. To this end, the CEO, audit committee chair, and board play a pivotal role in setting the tone on issues of culture and integrity—and making it clear that the GC is expected to bring independence to every discussion.
Equally important are open communication and frequent interaction between the GC and the audit committee—in regular audit committee meetings, executive sessions, and informally, particularly with the audit committee chair. Nearly half of webcast listeners said their GC attends every audit committee meeting.
*Ben Heineman, “High Performance with High Integrity,” Harvard Business Press, 2008.
Dennis T. Whalen is partner in charge and executive director of KPMG’s Audit Committee Institute.