Putting Your Board Committees to Work - Audit

(excerpted from Boardroom INSIDER for January, 2023)

Corporate board audit committees are the grandfather of committees.?Worldwide, most of the standards we’ve come to expect of board committees (independent membership, some level of topic expertise, tactical agendas) first showed up for audit, and they’ve proven the template for all the board committees that have followed.

?Audit committees also have the strictest fiduciary and compliance duties of any board committee, with tough legal responsibility for company financials, auditing and disclosures.?But that doesn’t mean they get everything right.?Here are some helpers for smoothing and professionalizing the work of your audit crew.

§ Starting a new year is the ideal time for a bit of board housekeeping that’s too often ignored – regular board review of committee charters.?This is most crucial for your audit committee due to boards’ tendency to treat it as the “kitchen junk drawer” of the board.?“Every committee has a charter, so make sure you scope it out,” advises Krista Parsons, managing director of the Audit Committee Program for Deloitte & Touche.?Set aside board agenda time to compare what your audit committee is now taking on vs. what it was actually chartered to do… you’ll likely find plenty of “charter drift.”?Here are some good sources for model audit committee charter language.

§ ?Talent on the audit committee is more crucial than on other committees due to the highly technical financials involved, as well as tight audit and disclosure rules.?A couple of decades ago, regulators and world stock exchanges started requiring someone (if not all members) to offer verifiable “financial expertise,” most often as a CFO or audit firm partner.?But the workload and stakes involved on audit also demand a good administrator and true leader -- which some committee chairs aren’t.?“The role of the chair is important,” notes Parsons.?“They assure candid conversations and good information, and can pull discussions out of any rabbit holes.”

§ Focus hard on audit committee processes – they always have too much to do and too little time.?Sweat over building a good, comprehensive annual committee calendar, and then agendas for the individual meetings.

§ Clumsy, bloated, technical information packs remain too common for audit committee meetings.?PWC suggests… A management financial analysis, Form 10-K (include executive summary of major changes from prior filings), Chief audit executive points (summary of audits completed compared to plan, significant unresolved findings, audit plan changes, and other sensitive items), Dashboard of key information (audit reports issued, unresolved issues, past due findings, trend analysis, and internal audit resource needs), chief compliance officer report (significant new claims, unresolved claims, risk assessment changes, and other sensitive items), External audit correspondence (engagement letters, mgmt. representation letters, legal), Changes and updates from the prior year or quarter, with explanations).

§ “One of the biggest pieces for audit committee effectiveness is to simply understand how the company makes its money,” concludes Parsons. “This seems basic, but most [committee] orientation doesn’t cover it.”