Audit Committee: The Kitchen Sink of the Board
The role of the audit committee has changed significantly since the passage of the Sarbanes-Oxley Act of 2002 (SOX), with many audit committees now overseeing a variety of emerging risks and balancing an ever-increasing workload. In seeking to understand more about audit committees’ evolving responsibilities, proxy disclosure strategies, and self-evaluation processes, the Center for Audit Quality partnered with academic researchers at the University of Tennessee Knoxville’s Neel Corporate Governance Center and the Pamplin College of Business at Virginia Tech who interviewed audit committee chairs or members from a variety of industries, company sizes, and maturity levels. To supplement the views of audit committees, the researchers also interviewed members of the investor community and those charged with preparing proxy disclosures to learn how audit committees can better communicate their oversight responsibilities.
Collectively from these interviews, the research team gleaned leading practices related to three questions of current interest to audit committees and their stakeholders that are discussed in this publication:
- How can boards effectively allocate oversight responsibilities to the audit committee?
- How can audit committee members keep up with an ever-evolving workload?
- How can audit committees improve their disclosures related to audit committee oversight responsibilities?
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How can boards effectively allocate oversight responsibilities to the audit committee?
- Perpetually assigning emerging risks to the audit committee (i.e., the “kitchen sink” approach) can lead to suboptimal oversight due to overworked audit committees and a “check the box” mentality.
- Traditional audit committee skillsets relate to financial reporting and internal controls. As audit committee responsibilities evolve, it is important that audit committee skill sets evolve as well.
- Some audit committee members advocate for the audit committee to oversee these emerging risks because of their personal skills and interests. In these cases, audit committee members should be careful to avoid succumbing to overconfidence bias and ensure that a clear succession plan is in place without them.
- To effectively allocate oversight responsibilities, audit committees may need to consider situations when it makes sense to push back on the board.
How can audit committee members keep up with an ever-evolving workload?
- Audit committee members should be purposeful about developing skillsets that match oversight responsibilities:
- Actively assess the committee’s key risks when planning for continuing education opportunities and utilizing specialists where needed.
- Regularly evaluate whether audit committee refreshment is needed to keep up with the necessary skill sets to properly oversee evolving risks.
- Carefully manage the audit committee agenda by mapping out risks to allow for deep dives on a rotation of topics throughout the year.
- Audit committees can free up time for additional responsibilities by managing the agenda and relationships:
- Work with management to fine-tune the types of materials delivered in advance and hold audit committee members accountable for reading them.
- Reflect on whether meetings allowed for sufficient time to evaluate management’s response to key risks, and schedule meetings so that they can go long or continue at an additional time when needed.
- Maintain a collaborative relationship with management to foster transparency.
- Adopt leading practices to manage shared governance across board committees.
How can audit committees improve their disclosures related to audit committee oversight responsibilities?
- Audit committees can begin by defining the goal of audit committee-related disclosures. These disclosures provide an opportunity to be transparent about audit committees’ duties and actions and provide confidence that the audit committee is fulfilling its fiduciary duty.
- Rather than starting from scratch, audit committee members can use existing publications from the CAQ, this publication, and other sources to reduce the time needed to identify leading examples from peers.
- Audit committees can lead the charge when collaborating with management to commit to enhanced disclosures.
- Companies should seek feedback from investors and regularly reevaluate whether disclosures are meeting investors’ expectations.
Opportunities to Polish Audit Committee-Related Proxy Disclosures
Putting together everything the researchers learned during the interviews, the following areas have been identified as the greatest opportunities for enhanced audit committee disclosures.
- Clearly define the allocation of risk oversight for the overall board and the committees. Audit committees and investors both recognize that each board has a unique way of allocating risk oversight to the board overall and to the committees. In order for investors to assess whether the qualifications of the audit committee are appropriate, they first need to understand what risks are overseen by the audit committee.
- Explain why the audit committee members, individually and as a whole, are appropriate for this specific company. Investors and audit committee participants both see the benefit of clearly communicating who is on the audit committee and their qualifications. Companies can further improve this disclosure by telling a story to highlight how specific qualifications align with company-specific risks overseen by the audit committee.
- Highlight continuing education. Given that many audit committees believe that a key aspect of managing evolving responsibilities is continuing education and constantly learning new things, companies have the opportunity to showcase what audit committee directors are doing to stay up to date with current issues and evolving risk areas.
- Describe how the audit committee addresses key risks. Very few audit committees currently provide detailed disclosure of the key risks addressed by the audit committee, but this was one of the most frequently discussed issues with investors.
- Discuss more than just external audit oversight. Conversations with audit committee participants reveal that their jobs are much greater in scope than purely external auditor oversight. Thus, the disclosures should also provide a timely discussion of the expanded set of oversight responsibilities.