NACD’s third annual Audit Committee Chair Advisory Council brought together audit committee chairs from major U.S. corporations and key regulators and stakeholders to discuss a range of issues impacting financial reporting and audit committee oversight.
Larry Smith (left), Terry Iannoconi and Rosalie Wolf (photos by Jacuqulyn Maisonneuve)
One key area of interest was the need for detailed disclosures of corporate political contributions in light of the Citizens United case, and “robust oversight” of donations. A clear policy on the reporting is necessary for any company, participants said, with some investors calling for a “no-donations” policy at some firms.
Company policies were widely approved by shareholders in 2011, with ISS’s final U.S. Postseason Report noting that proxy contests were less prevalent in the past year. Only nine contested meetings went to a shareholder vote during the first half of 2011, compared to 14 and 25 for the same periods in 2010 and 2009, respectively.
This article is adapted from the “Summary of Proceedings of the 2011 Audit Committee Chair Advisory Council,” available free to all NACD members at NACDonline.org.
“Say-on-pay” proposals were voted down at 1.6 percent of the Russell 3000 firms reporting results, involving only 38 companies through September 2011, and pay programs received an average of 92.1 percent support from investors. As say-on-pay votes gave shareholders an alternative to voting against compensation committee members, the number of Russell 3000 directors failing to garner majority support fell by nearly half.
An SEC update to the Advisory Council highlighted a number of issues upper most on the Commission’s agenda with key implications for audit committee oversight—including Dodd-Frank rulemaking on conflict mineral disclosures, clawbacks of executive compensation and median-pay calculations, as well as offshore cash and the use of non–GAAP metrics in SEC filings.
Advisory Council delegates expressed particular concern over future clawback provisions. They agreed on the importance of ensuring a clear, unambiguous tone at the top and expectations that all relevant facts are considered when making a restatement decision. Yet some noted that the clawback provisions raise some problematic questions, including: Do companies have the systems to implement this? What are the metrics being used? And, if earnings per share (EPS) is used, will it create measurement challenges related to shares outstanding, timing and other inputs to the EPS metric?
In addition, the SEC update noted that the Commission may consider allowing statistical sampling to alleviate possibly cumbersome calculations of median pay, and is examining material disclosures regarding cash held offshore.
Auditors emphasized the need to consider the potential impact of accounting changes on IT systems. In order to avoid “Y2K-like scrambles,” Advisory Council delegates agreed that both audit committees and management should begin identifying what the company needs for implementation, including processes and resources.
Concern about the volume of disclosures required in SEC filings was a particular sticking point. Participants noted the ongoing problem of “disclosure overload,” compounded by the widespread use of boilerplate disclosures driven largely by the fear of litigation. “Telling investors that if the company doesn’t sell products its performance could suffer, doesn’t tell them anything, really,” said one participant.
The Public Company Accounting Oversight Board has a number of initiatives underway, including possible changes to the auditor’s traditional “pass/ fail” reporting model and mandatory audit firm rotation. There was general agreement that a more robust audit committee report—describing in more detail what the audit committee does—would be beneficial. However, the scope of an expanded audit committee report may be limited to what corporate counsel is comfortable saying in the proxy. Attendees also expressed desire for more communication and transparency about the PCAOB inspection process and the significance of inspection findings.
Regarding auditor independence and skepticism, participants noted the difficulty of challenging the auditors. Using executive sessions effectively and meeting with the auditor informally, outside of regular meetings, may be invaluable solutions. While informal meetings may provide additional nuance, in formal meetings the auditor should provide views and perspective, not simply “We did the audit, and it complies with accounting standards.”
Citing the 2011 KPMG Audit Committee Institute survey that revealed that IT risk and emerging technologies are the top issues that audit committee members want to devote more time to over the next 12 months, participants discussed the significant— and accelerating—challenge of effectively overseeing IT risk and governance.
Boards (often with the audit committee taking the lead) are delving deeper into the risks posed by IT and emerging technologies that are transforming the business landscape, from cloud and social media to mobile devices and data analytics. “Defensive” IT risks—data security and privacy, compliance, business continuity and the integrity of financial reporting system—are in the forefront, but boards are also increasingly concerned about strategic IT risks— those posed by the failure to leverage technology to innovate and build competitive advantage. As a leading practice, companies are putting “governance frameworks” into place for IT, data and social media to help manage and oversee these assets as a risk and an opportunity. “Any board that’s not focused on this is missing the boat,” noted one audit chair.
Recognizing that information prepared and presented by management can dominate the boardroom agenda and dialogue, attendees discussed the ongoing challenge of “asymmetric information risk,” as well as clues or indicators of when this risk is too high. While clearly a full board issue, audit committees—given their inclination to view information through a “risk lens”—may be in the best position to monitor this issue.
The group discussed what actions would be meaningful countermeasures to asymmetric information risk, with much of the dialogue focusing on the importance of bringing third-party information and “dissenting views” to the board.
Takeaways
NACD identified three action items stemming from the dialogue to advance audit committee practices and address the common objectives of Advisory Council representatives:
- Identify and facilitate opportunities for audit committee chairs to meet with the PCAOB and exchange views on a more regular and proactive basis.
- Draft a model or template for an expanded audit committee report.
- Develop a board-level educational resource to help directors better understand—and stay apprised of—IT risks and emerging technologies.
Participants
Charles E. (Eddie) Adair: Audit Committee Chair, Tech Data Corp.
James B. Bachmann: Audit Committee Chair, Nationwide Insurance
Joseph R. Bronson: Audit Committee Chair, Jacobs Engineering Group
Meredith B. Cross: Director, SEC Division of Corporation Finance
Gerald M. Czarnecki: Audit Committee Chair, State Farm
Kenneth Daly: President and CEO, National Association of Corporate Directors
Cynthia A. Fornelli: Executive Director, Center for Audit Quality
Peter Gleason: CFO, Managing Director, National Association of Corporate Directors
Daniel L. Goelzer: Member, PCAOB
Judith Richards Hope: Audit Committee Chair, General Mills
Sherrill Hudson: Audit Committee Chair, Publix Supermarkets
Terry Iannaconi: Senior Technical Partner, KPMG LLP
James P. Liddy: U.S. Vice Chair, Audit, KPMG LLP
Mary Pat McCarthy: U.S. Vice Chair, KPMG LLP, Executive Director, KPMG’s Audit Committee Institute
Patrick S. McGurn: Special Counsel, Institutional Shareholder Services
George Muñoz: Audit Committee Chair, Marriott International
Charles H. Noski: Audit Committee Chair, Microsoft
Michael J. Passarella: Audit Committee Chair, Unum Group
David Y. Schwartz: Audit Committee Chair, Walgreen
Lawrence W. Smith: Member, FASB
J.W. Mike Starr: Deputy Chief Accountant, SEC
Richard G. Tilghman: Audit Committee Chair, Sysco Corp.
Rosalie J. Wolf: Audit Committee Chair, TIAA-CREF
Ann Yerger: Executive Director, Council of Institutional Investors