Improve the Effectiveness of Your Audit Committee


	Lynn Westergard

May 2010

Improving the Effectiveness of Your Audit Committee

As the economy improves, now is a good time to examine whether recession cost-cutting in technology, staffing, marketing and operations can be sustained or whether infrastructure elements should be restored

As the economy recovers, companies and not-for-profit organizations are faced with a host of new challenges. In order to prepare for those challenges and the risks they will create, audit committees should consider these steps:

Get Back to Basics. An audit committee is typically responsible for oversight of financial reporting, disclosures, internal controls and the company’s audit process. Therefore, each agenda item before the audit committee should relate to one of those four areas.

During the past 18 months, the recession has likely dominated audit committee agendas. Audit committees should consider revisiting their goals and expectations and develop an agenda that directs the committee’s focus back to the fundamentals.

Assess the Composition of the Audit Committee. Periodically, it is appropriate to assess the level of financial expertise that each member of a committee possesses, especially if the composition of the group has recently changed.

If the company anticipates significant changes in the regulatory environment, now may be the time to add suitably qualified members to the audit committee. At least one member should possess in-depth financial expertise. If the company is heavily regulated or subject to complex accounting policies and other requirements, it is prudent to require at least two members to have auditing or in-depth accounting experience.

Get a Handle on Operational Risk. The company’s risk profile may have changed in light of decisions made during the recession. For example, cutting staff or deferring capital investments might have been wise and appropriate a year ago. However, these decisions may now adversely affect the company’s long-term financial performance. The committee should consider asking management to review significant operational decisions made in the last 12 months in order to determine if excess risk was created.

Revisit Accounting Policies and Plan for Upcoming Changes. Any accounting policy revisions that took place in the last 12 to 18 months should be reviewed in greater detail. (It may not have been feasible during the recession.) Ideally, the audit committee should also take time to review significant proposed changes that are likely to impact the company in the next three years.

For example, adopting International Financial Reporting Standards will require considerable time, effort and expense. Determining whether the finance function has the appropriate expertise and resources to support IFRS is an important step in ensuring successful implementation. In addition, it is beneficial for audit committee members to begin developing an understanding of IFRS.

Consider Exposure to Companies Experiencing Financial Difficulties. The effects of a recession can take years to ripple through an economy. Suppliers and customers may still be experiencing those effects. The committee should ensure that management has identified the company’s material relationships and the potential financial and operational impact if any of those businesses go under.

Review All Disclosure Sources. In addition to regular financial reporting, companies use a myriad of resources to disclose information. For example, they may issue press releases and post announcements on their websites.

But many companies also have a presence via online social networking sites, such as Facebook and LinkedIn, that tend to involve fewer controls than traditional disclosures. Collectively, these sites reach millions of people. It is extremely important that social networking tools are used appropriately and the information being shared is accurate and consistent with the company’s perspective.

Focus on Fraud. As a result of recession-related cost-cutting, there may be an increased risk of internal and external fraud, including the theft of intellectual property. It is a good time for businesses to perform a fraud risk assessment. Proactively assessing fraud risks can dramatically reduce the probability of losses occurring.

More Questions

Does the committee have an appropriate number of qualified members considering the size, structure and complexity of the organization?
Does the committee have unrestricted access to the organization’s documents and the personnel?
Before a meeting, are the agenda and other relevant materials distributed to members so they have time to properly address the issues?
After a meeting, are the minutes distributed on a timely basis?

By answering these questions and taking the above steps, an audit committee can help improve performance as the economy recovers.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.