How to lead
A Committee
Audit Committee Chairs: Tips for Effective Audit Committees
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inside America's boardrooms the
informational show for board members and
corporate secretaries brought to you
with knowledge partners diligent PwC
Center for audit quality the conference
board and corporate board members along
with content contributors equal our
Meridian compensation partners Wilson
Sonsini Goodrich Androzani Donnelly
financial solutions and the Society for
corporate governance this edition of
inside America's boardrooms I'm TK curse
that are the CEO boardroom resources and
the co-founder and editor at large of
corporate board member magazine it's my
pleasure to welcome you to show we're
shooting here in the New York offices of
the conference board and it's a very hot
day in New York but we've got a great
topic here in the studio we're going to
be talking about audit committee chairs
tips for effective audit committees and
joining me is somebody that knows just
that wee bit about this topic and that's
Paula loupe who is the leader of PwC
governance insight Center welcome back
Paula thank you I'm very happy to be
here well it's a pleasure to have you
back
so and the reason we needed to have you
back is we've spent a lot of time
recently on committees no surprise
everything gets done in committees not
everything but a lot I think it's done
in committees we've been talking about
new committees we've been talking about
cyber we've been talking about comp
certainly nom gov which is on the rise
but I sort of feel like we've ignored
the Audit Committee just a little bit
because of all this other stuff that's
probably a good sign because that means
that if you remember back in the
sarbanes-oxley days all we did was talk
about that's right so they've got the
RAC together okay but it doesn't mean
that we can ignore it or let it go so I
saw that PwC put out a publication and
you did a blog on how effective audit
committees and how chairs can be the
difference
that's certainly what I'd like to talk
about so let's talk about the auto chair
and why they can make a difference and
why it's important yes the role of the
Audit Committee chair I think is is
really important it's first of all you
know you talked about the fact that you
know a lot of other committees are up
and coming more going on but the Audit
Committee
remember for most boards there's a
longest committee meetings right and
sometimes they go over so we need to
talk about about that trying to prevent
that from happening but long committee
meetings a lot of stuff on their charter
that they have to get through so lots of
really important topics that have to be
covered I think the other interesting
things about the audit committee chair
that are really important is they've got
to have some really pretty deep
relationships with a fair number of
individuals of the company so the audit
committee chair is usually the primary
relationship with the CFO with the lead
audit partner for the external auditors
with the head of internal audit and even
with the head of ethics and compliance
and those are those are good insights
that the board needs so that you know
audit committee chair really needs to
develop those relationships
obviously the chair reports back up to
the the broader board and also the audit
committee chair helps work with the
other committees on on different matters
so for example I mean you talked about
the comp committee but the comp
committee decides executive compensation
but usually using non GAAP or adjusted
on GAAP numbers numbers that aren't
audited so they really need to line up
with the audit committee chair to find
out what kinds of things the Audit
Committee has thought about related to
those numbers to make sure those are
good and then also the other hot topic
is culture company culture the audit
committee has a lot of insights about
company culture they usually get the
insights from whistleblower lines the
activities around compliance and
internal audit so they've got some good
data points but so do other committees
and so linking those insights and see if
there's any themes or trends there I
think is also really important that the
Audit Committee has to do and then last
but not least probably the most
important thing about your audit
committee chair I think it's they have
to have a really good
risk radar there's a lot of things that
come through that committee that can
have a significant impact on how
investors shareholders view the company
so you think about maybe a financial
reporting issue or an internal control
issue you've got to have somebody in
that seat that can really do a good risk
balance on what's important what's not
very often if there's an investigation
that has to happen it'll be done at the
audit committee and the audit committee
chair has to know when you've done
enough one to stop investigating when to
move on so risk I think that whole risk
monitoring has is really important in
that chair role and when you think about
it in many companies the cyber is still
in an audit committee and the agendas
expanded you're actually right more risk
oversight typically for the audit
committee so I've always considered the
audit committee to be like the
foundation of the boards committees okay
because just for all the reasons you
talked about if you've got a good audit
committee to build on I think that that
sets the tone for the company okay so it
makes it and we believe this about every
committee but the chairs of these
committees make a enormous difference
okay they do work in between they set
the agendas they really so when you're a
board you're having to make sure that
you find the right person to do that so
a lot of chairs are important so with
all your research and all your
experience what tips do you offer the
audit chair in your publication and
again and everything that you've been
producing what tips the offer so an
audit chair can improve the
effectiveness of the audit committee
yeah so the first place I'd start is I
would say make sure you get a handle on
the composition of your committee and
you know take into consideration things
like succession planning but even just a
foundational who's going to be on the
committee you know on average I think
there's probably about four members to
an audit committee that's the average
most common
that we see but it's anywhere between
three and six members on the committee
you have to have a financial expert or
disclose that you don't and why so most
almost all obviously have a financial
expert at least one but thinking about
the diversity of that composition and
when I say diversity I think really
about diversity of experiences so you
know you might want to have somebody
with an audit background somebody with
you know street financial reporting you
know CFO type background but then given
all those risks that you just talked
about that a lot of audit committees are
overseen you know I think a CEO or
someone with that broader perspective is
also good to have in the room so making
sure that you have the right experiences
of the committee members I think is
really critical so I'd start with
composition the next big trick area I
guess really of most of the rest of our
all-around planning and organizing like
I said there's a lot of stuff on the
plate in the last couple years that
plate has expanded for this more of the
risk stuff so making sure that you're
really lined up with the Charter you
know what your agenda is gonna be
throughout the year you're developing
relationships with these key management
folks that are going to be important to
the committee throughout the year and
that takes periodic meetings and doing
things beyond just your board sessions
another important thing to think about
is pre calls before the audit committee
meeting so on average probably about
eight audit committee meetings a year
some telephonic some in-person probably
a blend but having those pre calls
before the audit committee meeting with
the key players from management and with
the lead partner from the external audit
firm are really important to make sure
one you understand the materials to you
know you understand how they're going to
present them what insights they're gonna
provide are there things you want to
pull out from the presentation that you
think are gonna be really important for
the committee where do you want to focus
that and again it really helps to build
that relationship and that trust between
the two so pre read or pre calls are
important pre read materials are really
important as we all know materials of
now you know they're growing if you
print them all out in a staff
now they're mostly electronic but the
volume of materials is really growing so
how can you help the Audit Committee get
through all those materials so tips and
tricks around highlighting changes from
reporting quarter-over-quarter you know
maybe for people like internal audit
that's reporting or the head of
compliance that's reporting can you get
to some sort of dashboard reporting
that's easy for the committee to focus
on things so I think really going
through the pre read and trying to find
better ways for the committee to get
through it digest what's there but get
to the meat of the issues the things
that you really want them to focus on
before you get into the room then when
you're in the meeting right and you've
got to run this thing pretty efficiently
and I mentioned earlier that audit
committee meetings are long and very
often will go over so you want to try to
get them to run on time and so that
means really organizing the sessions
keeping the process moving through
preventing the presenters from just
reading the pre read material back to
the committee but instead focusing on
themes trends highlights really
important things that you might not have
gotten out of the dashboard if you will
but they can bring in experiences from
the past or whatever and provide themes
to the committee and then the last thing
around tips and tricks that I would say
or two more things is use of executive
sessions and private sessions so private
sessions again are those where you have
a private conversation with one of the
presenters executive sessions are just
when the committee members need to have
a conversation and that should happen a
couple times a year over a variety of
topics but it should happen occasionally
and the last area would be that proxy
disclosure you know that's one thing
that we really do encourage audit
committee chairs to take a fresh look at
every year make sure you're getting out
there with some good transparent
information about all the great things
the committee is doing so that the
shareholders and investors know what's
happening yeah I think boards are
getting that slowly but sure
every year they're significantly
increased disclosure in many areas you
know board evaluations committee
operations whatever so it's still gonna
take a little bit for you know as more
and more people get accustomed to
reporting out and disclosing that stuff
but so I want to get back to the chair
okay cuz again we both know how
important that is so in your experience
what is the stumbling block to a board
not getting the right chair okay meaning
is it a succession thing where they
brought members on and they weren't
thinking about who was gonna replace
them is it something where you got to
make sure that somebody is current
because it's changing all the time
digital transformation is affecting
things so what from your experience what
do people not get right in the process
to make sure that they get the right
yeah that's you yeah and this comes up a
lot I mean I get calls when people say
oh my gosh are one financial expert on
the board something happened to him and
now we have nobody we're in a panic we
need to find someone and you think well
how could you possibly have gotten into
that situation but I think it is it goes
back to succession planning it goes back
to we still see boards that really only
have one one name because again we're
only seeing what's disclosed but one
named audit committee financial expert
you know most of the time if you look at
the BIOS there's probably more than one
in there but they really are only
disclosing the one so thinking about
making sure you're really comfortable
every day with it you've got one and
you've got a spare just in case you need
it
so so I would say the succession
planning and the robustness of or the
depth of what you've got on the
committee or things to make sure you
have a place the other thing that we're
actually seeing more and more of is is
transition thinking you know how do you
transition when you know you have an
audit committee chair that maybe he's
going to move on or going to retire
rotate off
how are you transitioning the new person
and we're actually seeing more often
than not it's an audit committee member
that goes into that role and if so there
are part of the committee for a full
year so they can see a full cycle before
they actually take on the chair role
that's obviously the best way to do it
but recognizing in advance that you may
have to do that succession and having
some depth lined up is really important
so I think we've done some shows in the
past on transitioning that yeah to chair
position so that should be in our
library so how can people get a copy we
got about 15 seconds left so people get
a copy of the audit effectiveness that
you guys have produced please go to our
website the PwC governance insight
Center website and you can find all of
our things categories by committee and
go under audit committee and you'll find
all of our grade on a committee
excellent series and this is just one of
the thought leadership pieces in that
series so there's a whole slew of stuff
well Paula loop thanks again for joining
us we had to get make sure you get that
audit committee back in its rotation
it's got a lot of this place that's for
sure so I appreciate your time
and that will conclude this edition of
inside America's boardrooms we hope you
enjoy the show we'll be back again next
week when we take another look at a
critical topic that'll help you
join us again next week for inside
America's boardrooms
brought to you with knowledge partners
to diligence PwC Center for audit
quality the conference board and
corporate board members along with
content contributors equal our Veridian
compensation partners Wilson Sonsini
Goodrich Androzani Donnelly financial
solutions and the Society for
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