Financial reporting, compliance, and the risk and internal control environment, will continue to be put to the test in 2017 by slow growth and economic uncertainty, technology advances and business model disruption, cyber risk, greater regulatory scrutiny, and investor demands for transparency as well as dramatic political swings and policy changes. Focused yet flexible agendas – exercising judgement about what does and does not belong on the committee’s agenda and when to take deep dives – will be critical for the Audit Committee.
Drawing on insights from our recent survey work and interactions with audit committees and business leaders, we highlighted seven items that audit committees should keep in mind as they consider and carry out their 2017 agendas:
1. Give non-GAAP financial measures a prominent place on the audit committee agenda. Companies should have a robust dialogue with management about the process and controls, by which management develops and selects the non-GAAP financial measures it provides, their correlation to the performance of the business and results, and whether the non-GAAP financial measures are being used to improve transparency and not to distort results.
2. Monitor implementation plans and activities for major accounting changes on the horizon – particularly the new revenue recognition and lease accounting standards. The implementation of these two new standards is not just an accounting exercise – audit committees will want to receive periodic updates on the status of implementation activities across the company, the adequacy of resources devoted to the effort, and the plan to communicate with stakeholders.
3. Redouble the company’s focus on ethics, compliance and culture. As a result of the radical transparency enabled by social media, the company’s culture and values, its commitment to integrity and legal compliance, and its brand reputation are on display as never before. Ask for internal audit’s thoughts on ways to audit/assess the culture of the organization.
4. Focus internal audit on key areas of risk and the adequacy of the company’s risk management processes generally. It is imperative to help define the scope of internal audit’s coverage, and if necessary, redefine the internal audit’s role. Set clear expectations and make sure internal audit has the resources, skills and expertise to succeed.
5. Monitor key regulatory initiatives to enhance transparency of the audit process. It is crucial to stay apprised of the PCAOB and SEC projects and their implications, and to take the lead on audit quality by weighing key indicators, such as the knowledge and experience of the engagement team, the audit firm’s internal quality reviews and PCAOB inspection findings.
6. Quality financial reporting starts with the CFO and finance organization; maintain a sharp focus on leadership and bench strength. Given the rate of CFO turnover and the crucial role the CFO plays in maintaining financial reporting quality, it is essential that the company has succession plans in place not only for the CFO but also for other key finance executives (controller, chief accountant, chief audit executive, treasurer…
7. Make the most of the audit committee’s time together – inside and outside the boardroom. Leading audit committees recognize that the committee’s efficiency and effectiveness in the boardroom increasingly hinges on spending time outside the boardroom, to understand the tone, culture and rhythm of the organization.