lead

Audit Committee Chairs: Tips for Effective Audit Committees



Sharing buttons:

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

choreography

[Music]