This article, authored by Henry R. Keizer and Mary Pat McCarthy, notes how the recent financial crisis has impacted the oversight processes of audit committees, marking an inflection point for corporate governance with committees exercising greater vigilance and increased focus and intensity. Boards are asking for more information to be effective in their oversight role: quality, timely information; healthy, productive discussions about risk; and confidence in companies’ management teams.

Renewed Focus on the ‘Basics’

Audit committees are reporting a renewed focus on the “basics” of oversight after having been overly focused on “process” in recent years. One of these basics is that boards want to be better educated by management in order to better understand the company and its industry, to stay apprised of issues and developments affecting the company, and to have more constructive discussions with management. Another renewed focus of boards and audit committees is the desire to be more closely connected with the management team. To do this, companies should have a clear understanding of the board’s expectations regarding the timing, frequency, and nature of communications with management. Boards recognize that they may need to exercise skepticism and test information presented by management, possibly seeking the views of independent third parties. Finally, boards are aware that accountability of both management and the board are in high demand and are addressing this through increased oversight and through examinations of board effectiveness, including their composition, independence, and leadership.

Top Priorities and Key Concerns

Boards cite some top priorities in order to increase their effectiveness in their oversight role. One key concern of boards is ensuring they receive quality information about the company’s business activities and risks. Another top priority for boards is oversight of the company’s risk management processes. Almost 75% of audit committee members in a recent survey by KPMG’s Audit Committee Institute and the National Association of Corporate Directors said they are reassessing risk management and oversight processes as a result of the financial crisis.
Challenges committee members face include understanding the link between strategy and risk and ensuring management has a holistic view of the company’s risk profile.

Committee members have higher levels of confidence regarding oversight of traditional financial reporting matters such as financial statement issues, disclosures, internal controls, and legal and regulatory compliance. However, in areas committee members cite as being least effective in their oversight, IT risk, significant risks facing the company, fraud risks, and risks posed by the financial crisis, members also feel the quality of the information they are receiving in these areas is lacking. By better understanding the board and audit committee’s needs, management can help support a more rigorous governance process and together, management and the board can work to create long-term value for shareholders.

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ERM Enterprise Risk Management Initiative 2009-05-01