As a former audit partner of a Global Six accounting firm, I’ve done my fair share of presenting at audit committee meetings. I’ve noticed that when it’s time for the auditors to present, there will always be the occasional board member who turns to his or her laptop for a bit of day trading or to check email (no, this didn’t hurt my feelings at all).
More important, I’ve been able to observe what characterizes an effective audit committee. This has been on the minds of Public Company Accounting Oversight Board members lately, too. Last month, the PCAOB unanimously adopted AS 16, Communications with Audit Committees. Though the intent is to enhance the relevance and timeliness of communications between the auditor and the audit committee, the standard has little to do with influencing the audit committee’s dynamic with management.
So, here is a compendium of my direct observations on what separates a truly effective audit committee from the rest.
Risk-focused meetings. Meeting agendas should evolve with the growth stages of the company and respond to changes in the economic and competitive environment.
Challenge historical policies and practices. The key operating and financial reporting risks will never be uncovered unless the committee challenges the past.
Transparent and honest communications. It’s crucial that audit committee members talk candidly about what’s going well and what isn’t.
A dynamic chair. It’s paramount that the committee is led by a strong communicator who facilitates discussion, keeps it on track with the agenda and acts as an objective voice during heated exchanges.
Global representation. Committee members who represent the company’s foreign operations add insight into cultural, legal and tax-structure differences.
“Pre-meeting” with the finance team. The most effective audit committee I observed flew in the day before the meeting to have dinner with key finance team members. This informal setting facilitated communication and gave the committee a chance to formulate more questions. It also gave the finance team a heads-up about late developments that weren’t on the agenda.
Quarterly lunch with the independent auditor. Yes, I understand that the audit partner “takes you out” and then bills the company, but he or she can provide valuable insights, such as feedback on the performance of the management team and an honest take on accounting and internal control risk areas. The committee chair isn’t likely to get this kind of information from the formal slide presentation.
For more suggestions, check out Ernst & Young’s excellent article, “Audit Committees: Going Beyond the Ordinary.” It’s a great piece from the June 2012 issue of E&Y’s BoardMatters Quarterly newsletter.
