Audit committee: The toughest job you’ll ever love
I’m preparing for an upcoming board audit committee meeting, and I am conscious that I am reading the briefing papers more carefully, slowly and deliberately than usual. I am always thorough, but recent events have given me pause. I am sure I am not the only member of an audit committee who, seeing the headlines about accounting that touch the boardroom, is taking extra care of late.
In April, Groupon’s audit committee made headlines because the company found some accounting discrepancies that should have been caught earlier. This followed concerns about the company’s accounting before it went public in November of 2011. The spotlight was on Groupon’s board and its audit committee, with questions about whether it had enough expertise in the room and whether all had been asking the hard questions. The committee had strong business experience ? among its members was Starbucks Chief Executive Officer Howard Schultz ? but the bigger question was whether the board had enough financial experience. Some mea culpas and a couple of new board members with weighty accounting credentials later, Groupon presses on.
This past month, Starbucks, Amazon and Google were hauled before a committee of MPs in the U.K. for accounting practices that seem to be legal, but have struck people as unsavory. Clever accounting designed to save every penny has given boards pause for thought. The practice fulfills the brief of saving money and squeezing out every ounce of profit for a company, but just because we can do it, does it mean we should?
When we sit in audit committee meetings, or when we are discussing financial health and strategy for companies, we can’t be siloed in our thinking. We can’t have our finance hat on for part of the discussion, then swap it for another hat when we talk about marketing or corporate reputation or corporate social responsibility. Investors care about the health of the business, but the public also cares about how business is conducted. We don’t operate in a world where we can tell people not to look behind the curtain to see how the magic happens. As the old advice goes, don’t do anything you wouldn’t want reported on the front page of the New York Times, or in this case, reported by Tom Bergin of Reuters.
Last week, Hewlett-Packard accused Autonomy of poor accounting and of hiding the real figures during the due diligence of the latter company’s acquisition. This is a story still in motion, but there are a number of people and organizations that will be getting extra scrutiny in the coming weeks. Some of the questions being asked: Were Autonomy’s accounts shady? If they were, was the board aware, and more specifically, was the board’s audit committee aware? If they weren’t, why not? If they were, did they collude in some sort of a cover-up?
In the meantime, questions are being asked about the audit and accounting firms for HP as well as for Autonomy? for one, why didn’t the 15 different financial, accounting, and legal firms involved in HP’s acquisition of Autonomy flag any of the wrongdoing that Autonomy is accused of? As the story unravels, we’ll see who was wilfully blind or purposely misleading. It’s likely there will be months of investigations ahead.
So, back to my audit committee papers and my upcoming meeting. I just reread the line in my briefing papers from the auditors that notes: “… primary responsibility for the prevention and detection of fraud rests with management and those charged with governance …” As audit committee members, our jobs are to read the story that the numbers tell, ask tough questions and communicate with the auditors about any concerns that we or they have. I am reading my papers with care, looking out for discrepancies or things that should be there but aren’t, making notes of questions to ask. Like many of my audit committee colleagues, I will be entering the room ready to be engaged ? perhaps sitting a bit straighter with the echoes of audit and accounting headlines in the back of my mind.
In the Boardroom with Lucy Marcus: Hewlett Packard has made allegations of major accounting fraud at its British software firm, Autonomy. Here's a look at the fall-out: apportioning blame, audit committees & board responsibility.
Note: This column is from my Reuters opinion column, where I write about boards, leadership, and ethics. Also, for more conversations on boards and the changing boardroom you might like the tv series I host for Reuters “In the Boardroom with Lucy Marcus”.
If you are on Twitter come by and say hi. I'm @lucymarcus
Photo: Look closely. Taken at the Pergamonmuseaum, Berlin
Shakambhari Group
11 年It's great and providing a panorama of the role of audit committee. In a fast changing world, specailly witnessing the unpredicatible global economy, the role of the auditing firms and an endeavour to restore the confiddence of the stakeholder, the role and responsibility is multiplying . Corporate governance is real challenge before any organisation and in the pursuit audit committee is under obligation to play the major role and responsible for the heath of the organisation. The word audit originated with the development of accounting and travelled to the path from true and accurtate view to true and fair view for the valid reasons that it is not posible for any auditing firm to vouch and check the tranche of trasaction and the personnnel of the job are not expert in all dimesions of activity carried on by the organisations, consequently during the course of dischrging the repsonsibility, auditors may overlook some material points which may place the Board room in an embrassing situation before the Stakeholders. .Therefore, the role of orgnaisational executives is very important in shining the GLORY of the Audit Commitee. BEFORE PARTING----------------------------------------- I WOULD HUBLY SUBMIT THAT LITERALLY 'MATERIALITY CONCEPT' OF THE ACTIVITIES CARRIED ON BY THE COMPANY SHOULD BE GIVEN IMPORTANCE IN ALL AREAS OF THE BUSINESS ACTIVITY WHETHER IT FINANCE, ACCOUNTING, MARKETING, CORPORATE SOCIAL RESPONSIBILITY TO IMMUNE FROM THE CASACDING EFFECT OF DAMAGE CAUSED BY THE FACTORS INVOLVES .
Passionate about AI, authentic leadership, and accountability, great audit committees and trust | Focus on finance, health and good governance
11 年I've found it helpful to be flexible with a sceptical and supportive analytical approach whether operating as chairman of the Audit Committee or member of the board. The skill to be able to recognise themes that flow across regular IA reports (irrespective of the focus of the review) is critical. Themes like continued management overstretch, poor or limited policy compliance, data quality and timeliness of information should sensitise and focus your probing as a Non-exec. More importantly the off-line chats with management execs can also inform and suggest areas for gentle probing. The challenge for executives is to provide adequate levels of information to ensure the core strategic issues percolate through the pack of papers being reviewed. The audit committee adds its independent voice to the stream of assurances given to a board that management are 'taking care of business' - across ALL areas of business, not just the numbers. I prefer less of the 'sitting up straight' and line by line reading in favour of allowing the key trends in the performance to 'stew' - this can sometimes highlight why an issue is not in the pack of papers...
Chair Berkshire LEP, NED at Inspiration Healthcare plc and Maintel Holdings plc.
11 年Although accounting rules have got more complex there are many situations where the rules don't give the whole answer and therefore judgement is required; the audit committee should be clear where these items are and review the assumptions behind all material areas of judgement. As long as the executives are open and transparent with the issues this will be an interesting and worthwhile exercise and the committee can reach its own opinion based on experience, ethics and common sense without any particular need for technical accounting knowledge. If the executives are less than transparent you will need a strong accountant's instinct and persistence to raise the issues and get them on the agenda. In any case it is a really important role and not one that all NED's will feel comfortable in.
Member of the New Zealand Order of Merit: Senior New Zealander of the Year: AKO Tertiary Teaching Award
11 年For those of us who are on boards but do not come from an accounting background there can be a distinct feeling of anxiety about the accounts in general and the audit process. I do not want to spend years becoming an accountant, but I do bring to the board table a very strong Bullshit Awareness Ability. If a person cannot make me understand the figures, issues or whatever with a simple straightforward explanation, but uses flummery, complex explanations, or elaborate stories my BAA takes over and I will be on the alert to sleight of hand and possibly unacceptable practices. This is when I will really dig deep and be alert for unethical or unacceptable or illegal activities. An accounting person's alertness is triggered by figures looking out of place. Others of us listen to the words used and the body language evinced as a warning to ask questions. And if we cannot put our finger on the problem we have to be like a terrier and keep asking questions until we get a clear answer we can understand. We may be patronised by others, and this tool is frequently used by those who do not want us to know what is going on. But if you know that your judgement and BAA system is usually good, keep prodding until you fully understand and support the answer. The board is responsible for setting and keeping the culture of the organisation. Devious slight of hand, pushing the boundaries of acceptable practice etc. may not be the culture of the organisation you want to be on. Money is one KPI - not the only one.