Refocusing the Audit Committee's Agenda

When polled during the 2006 Audit Committee Issues Conference, co-sponsored by KPMG's Audit Committee Institute (ACI), more than half of audit committee members said they were only "somewhat satisfied" or "not satisfied" that management provides them with the information they need to oversee corporate accounting judgments and estimates. Some 80 percent said they wanted—or needed— to spend more time discussing this issue. And more than half were not fully satisfied that "management's discussion and analysis" presented a clear picture of the company's financial condition and the results of operations— the most recent and possibly most challenging of the Securities and Exchange Commission's reporting requirements.

In short, many audit committee members want a better understanding of this area of SEC reporting and, in particular, the processes used by management to arrive at its judgments and estimates. While audit committee members clearly have a growing appreciation for the importance of management's accounting judgments, as well as how difficult it can be to determine certain estimates, they want more oversight of accounting policies and processes and more oversight of risk management.

Risk management is largely uncharted territory for many audit committees, but awareness of this issue is growing. Furthermore, audit committee members expect their involvement in risk management to increase. More than 70 percent of audit committee members, directors and senior executives surveyed by ACI said their company's process to identify significant risks could be better, and only one in four were "very satisfied" that the board and audit committee effectively oversee the significant financial and nonfinancial reporting risks facing the company. More than 80 percent were not fully satisfied with the adequacy of the information and reports that management provides the committee regarding the status of its risk management efforts. An essential task for every audit committee is understanding precisely what its risk oversight responsibilities are vis-à-vis the full board and other committees.

Agendas drive activities. As the touchstone for all audit committee activities—both at audit committee meetings and during the year—the agenda and agenda- setting process determine where and how the audit committee focuses its time and attention. That said, nearly 40 percent of audit committee members surveyed say they're only "somewhat satisfied" or "not satisfied" with their committee's agenda-setting approach. More than half of the participants at our annual Issues Conference were not fully satisfied that their audit committee's 2006 agenda appropriately addresses the issues that require their attention and oversight. Moreover, some 75 percent of those polled say they are either somewhat or very concerned that the time devoted to compliance activities detracts from the overall effectiveness of the audit committee.

Well-designed agendas can help audit committees:

Identify and stay focused on their priorities.

Ensure their activities and charter responsibilities are in sync.

Take sufficient time for quality discussion.

Ensure good communication and information flow.

Facilitate periodic selfevaluations and ongoing education.