An effective Audit Committee that oversees financial health, risk oversight, internal and external audits is key to good corporate governance. There are some essential traits an audit committee must have ranging from intellectual questioning to emotional intelligence.
An audit committee member must always nurture the ability to be curious and seek out details. It is going much beyond what the executive team and external auditor may provide so that the board overall avoids surprises later. The committee members must interact with different parts of the business to get a better understanding.
Ethical whistleblowing process is another major trait, which has been missing from even blue chip companies. Whistleblowing incidents must be taken serious to ensure transparency.
The third critical trait is the ability to oversee risks. Typically large project outlay such as IT and digital tech plans is where audit committee puts more energy. Boards may need separate audit and risk committees when it comes to highly regulated businesses such as banking and financial services.
Other traits include the ability to take tough decisions, good social skills in building relationships, working as a team, great listening skills and finally, the ability to set clear agenda . This last one is specific to the chairperson of audit committee. The Chair will need to interact with the company secretary in fixing the meetings and agenda well in advance. There should be some time allocated for new issues that may crop up every quarter. Accounting for the turmoil and crises of 2020 should probably usher in hazard pay for board audit committees. Amidst the various lockdowns, material financials and disclosure matters changed on a daily basis. Regulatory authorities and stock exchanges have eased, tightened and changed rules globally.
Given the devastation of the second wave and the consumer confidence index is at an all-time low, here are six agenda items for a stronger audit committee.
Altering the agenda
One, Financial reporting will need a bigger focus now.
Two, forecasts would have changed radically in the last one year so the audit committee will need to ask how often management is updating its forecasts, what factors and models are being used, and what mechanisms are in place to check assumptions.
Three, the committee needs to gauge how well management is identifying and updating risks to the company (especially regarding Covid), and assessing the impact on results, liability and strategy.
Four, audit committee must assure that compliance programs aren’t being ignored during the emergency. Data security failures and insider trading are among concerns that become easier with execs working and communicating remotely. Another heightened area of interest is whistleblower policies. Indian regulators must issue new guidance for prosecutors on that. In the USA we have seen record whistleblower payments since the panic started because of the Justice Department guidelines.
Five, critical audit matters (CAMs) will see major changes in accounting for 2021, and too few audit committees are keeping up with their auditors on this. Even for those enterprises that had a CAM included in their last auditor opinion, things would have changed from 2020.
Six, make sure the committee is having conversations with auditors upfront – don’t wait until next March. Audit committees doing a good job of keeping lines of communication open with both the outside audit firm and inside audit staff during this time of remote governance, must ask how they plan to make a ‘virtual audit’ work, and what that means for the process.
Muneer is co-founder of the non-profit Medici Institute and a stakeholder in the Silicon Valley-based deep-tech enterprise Rezonent Corp. Ralph is global board advisor, coach and publisher