How to Craft a High-Functioning Audit Committee

One of the benefits of working with a variety of clients is that the PMM team is able to observe excellence in governance first hand. Many of our clients are putting best practices to work in their organizations, and they have high expectations for the performance of their boards of directors and their audit committees. I’d like to share some of the traits I see as hallmarks of high-performing audit committees. You can use my observations to assess the performance of your own audit committee. After all, you might be one of the companies we think are the best.

High-Functioning Committees are Aware of the Business Environment

The basic charge to any audit committee is to oversee both the company’s operations and its associated risks. Audit committees must understand and evaluate both internal and external audit functions, as well as management performance, but they also must be aware of other challenges that arise from a changing business environment. A few of the most pressing challenges audit committees for most organizations should be addressing include:

  • New Revenue Recognition Standard – The best audit committees know that now is the time to start planning for their company’s transition to the new standard. They face the challenge directly and require the accounting and IT teams to prepare and execute a plan to examine and respond to the new standard so that its impact is known ahead of time and necessary steps are taken to ensure as smooth a transition as possible.
  • Cybersecurity – Robust audit committees ask their IT departments to detail evolving threats to data security as criminals seek to steal a widening variety of information, including employee and client records, business plans, sensitive emails, medical records, and any other data that can be sold for a profit or used to damage a company. These high performing committees also require their IT departments to detail preventative measures, as well as threat responses if breaches occur. High-performing committees also know when to ask for help and don’t hesitate to enlist the services of companies like HORNE Cyber Solutions to assist their in-house teams.
  • Tax Benefits – High-performing audit committees employ procedures to ensure their organization is taking full advantage of available tax incentives such as R&D credits. At the same time, they ensure that the company’s tax compliance function is sound and adhering to key matters, such as those brought on by operating in multiple states.

High-Functioning Committees are Staffed with the “Right” People

By the “right” people, I mean committee members who are willing to take their jobs seriously, prepare thoroughly and ask tough questions when necessary. You don’t want members who are just going through the motions. Instead, you want committed members who have the time and experience to evaluate both the operations and risks present within your company.

High-Functioning Committees are Diverse

The high-functioning audit committees I work with are diverse groups. While diverse in some traditional ways, committee members also have diverse professional backgrounds. As one would expect, some  have finance backgrounds, but others (who often raise the most thought-provoking questions) are from other business backgrounds. Some members come from within the company; others are non-employee members. Domestic companies with overseas operations, have audit committee members with experience in international operations. Diversity is not just physical diversity; it is a diversity of thought and experience, and it is an essential requirement for peak performance.

High-Functioning Committees are Prepared

Audit committees report to their company’s board of directors and are reflections of their board’s vision. As such, it stands to reason that high-functioning audit committees are products of high-functioning boards. Such boards expect audit committee members to prepare for their meetings, using materials provided by the company’s financial personnel while keeping a constant eye on the market and applicable industry. If clarification or education on a specific topic is needed, audit committee members are expected to ask for it and financial personnel are expected to provide it. The job of an audit committee is not to approve management decisions without challenge; it is to examine management decisions from a position of informed oversight, challenging those decisions when appropriate.

Take a step back from your own operations and assess the performance of your audit committee. Are they helping to protect your company by asking the right questions, even when it’s uncomfortable? Are they taking a real interest in their work and asking for more information when needed? Are they proactive in their thinking?

If it feels like your audit committee is dragging its collective feet or thoughtlessly rubber-stamping management plans, perhaps you need to reassess their work and aspire to a high-performance audit committee. Your stakeholders will thank you.

 

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Topics: Audit, Board Members, Governance, Financial Reporting

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