Given the pressures on management, internal controls, and financial-reporting systems in this environment, the audit committee’s role—and its effectiveness—will be pivotal. We recently spent two days talking with 120 audit committee members from around the United States—across industries, large- and mid-cap—about their top concerns and priorities, and what they see as keys to audit committee effectiveness going forward.

Not surprisingly, the three areas cited by conference attendees as the “top concerns” for 2010 are the uncertainties of the economic/legislative environments, risk management/oversight and financial communications.

Risk, uncertainty and the audit committee’s role. The search for top-line growth is a critical priority for companies today, and boards are mobilizing management to rethink the company’s strategy, stress-test the business model and address—head-on—the challenges of a low-growth environment. Audit committees are helping to “ignite” the conversation about where the risks are in this environment—whether it’s Foreign Corrupt Practices Act risk associated with the search for growth in emerging markets, or focusing internal audit on the risks associated with the company’s new strategic initiatives.

Audit committees are also rethinking their risk oversight role. While more and more boards are assuming oversight responsibility for strategic risks, some boards still see an expansive role for the audit committee, encompassing oversight of the company’s risk-management processes as well as key substantive areas of risk.

Others take a much more restrictive view, as one panelist noted: “The audit committee exists to deal with one very significant enterprise-wide risk, and that’s the risk of either fraudulent or erroneous financial reporting. That’s plenty.”

Deeper involvement in all financial communications. Audit committees are intensifying their focus on all financial communications—from earnings guidance and earnings press releases to the MD&A and other disclosures. Some companies have taken the financial crisis as an opportunity to either discontinue earnings guidance, or reconsider the types and frequency of guidance they provide.

Our discussions also pointed to the earnings press release as perhaps the most important communication to investors today: “It’s where the action is,” said one director. But earnings releases often pose more issues than 10-Qs, as they contain important business information that often does not come from the financial reporting system, is not audited, and is not subject to internal controls.

The dialogue also highlighted key disclosure areas the Securities and Exchange Commission will be focusing on in 2010, including new disclosures companies must make about how they address risk, compensation, leadership and other aspects of corporate governance.

And, of course, audit committees will need to stay focused on a number of key financial reporting issues that became particularly acute during the financial crisis, including fair value, goodwill and intangible impairments, pension assets and obligations, and tax valuation allowances.

Gauging the audit committee’s effectiveness. Given the challenges ahead, conference attendees emphasized the need for audit committees to take a close look at their effectiveness, to ensure the committee is focused on the right issues and is in a position to help lead the business forward. To this end, panelists highlighted a number of questions for audit committees to consider as they monitor their performance:

• Do we have the right people on the committee—directors who understand the business and are willing and able to ask the right questions?
• Is each member of the committee capable of understanding the financial reporting issues and complexities arising from the company’s business activities?
• Do we take an active role in determining the committee’s agenda and defining its information requirements?
• Do we insist on transparency—both internal transparency (between management and the audit committee) and external transparency?
• Do we speak our mind? Do we listen? Do we build consensus?
• Do we take a hard look at our committee’s performance, and assess the performance of individual committee members?

Mary Pat McCarthy is U.S. vice chair, KPMG, and executive director of KPMG’s Audit Committee Institute.

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