Steadying the Tiller: insights from audit committee chairs
David Wood highlights some of the points arising in a new publication on the experiences and insights of audit committee chairs.
The audit committee oversees the company’s risks, internal controls and annual reports, and assesses the assurance in place for each of these on behalf of the board and the shareholders. The audit committee therefore has a key role, and a critical position within the audit committee is the audit committee chair.
Chartered Accountants, especially those who have had an executive position as a finance director, are ideally placed to be audit committee chairs. They have the financial knowledge, the experience of financial and broader corporate reporting, and understanding of assurance, both internal and external, to be able to lead audit committee discussions.
In 2012, ICAS, the FRC and the Institute of Chartered Accountants in Australia published ‘Walk the Line’ which provided insights from a series of interviews with audit committee chairs in the UK and Australia at that time. Much of the 2012 report remains valid but the new report ‘Steadying the Tiller’ builds on it by adding new insights and commentary on the more recent developments and the emerging challenges facing audit committees.
The current project commenced in the aftermath of the BHS and Carillion collapses, when renewed attention was being focused on the role of auditors and on the behaviour of boards and audit committees in the context of business viability.
The audit committee has a key role in ensuring the quality of the annual report and making sure that it is underpinned by the necessary assurance. The committee is critical in appointing the right external auditors capable of undertaking a thorough, challenging and comprehensive audit. It also liaises with the auditor in the audit planning, development and execution to ensure there is sufficient scepticism and challenge and that it results in a high-quality audit which provides value to the users of the annual report.
ICAS and Chartered Accountants ANZ hope that this publication will be of benefit to their members who act as audit committee chairs, through the sharing of perspectives and best practice. It should also contribute to the resilience of the business sector and the effectiveness of corporate governance in the UK, Australia and New Zealand, and in other jurisdictions across the world.
Role and responsibility
There are increased expectations on audit committees and the volume and breadth of issues facing them has significantly increased. The committee has a key role in challenging and supporting management, and in ensuring that the external auditors provide the necessary challenge to management whilst maintaining a good working relationship.
Skills and expertise
The audit committee needs financial and other specific expertise, but broader experience and an ability to ask challenging questions are also critical. The members of the audit committee also need to be able to contribute to the board’s diversity mix and broader discussions.
Integrity of the annual report
The core function of audit committees remains the oversight of the integrity of the company’s financial reporting, though greater attention is also now given to the front half narratives in the annual report. The audit committee is key to ensuring a quality and effective audit; careful advance planning is needed to make sure that there is a proper choice of audit firms when tendering the external audit.
A great deal of time and effort is put into the development of the annual report and accounts, including the Audit Committee report, but there is widespread disappointment that investors do not appear to read these nor wish to engage with the audit committee.
Good induction and maintaining communication and liaison with the company are important, to enable audit committee chairs to keep up to date, ensure the right information is obtained for audit committee discussions, and to know when to probe and challenge.
In the UK, the strategic report, audit committee report, extended (external) auditors’ report and the ‘fair balanced and understandable’ principle all met with broad support as useful additions to reporting.
The viability statement was almost universally condemned as causing confusion by contrast with the going concern statement on the financial statements, and not achieving its original objective.
Expectations and skills
There is an increasing volume and breadth of issues to monitor/address, and expectations on audit committees have increased. Specialist skills are increasingly needed and finding audit committee members with a diverse skillset who can also meet the broader needs of the board can be challenging.
Pressures on the chair role
Planning ahead for audit committee meetings is critical, to cover the range of issues, obtain the necessary information and expert input, and ensure appropriate discussion, sometimes on complex technical matters. Increasingly, audit committees need to understand not just the company’s operations and businesses but its culture.
Ensuring an effective and high-quality audit
Ensuring sufficient choice in external audit tenders has grown more complicated, particularly in financial services. It is increasingly important to demonstrate to stakeholders the rigour of the audit committee’s auditor appointment process and oversight of the external audit, to ensure its quality and effectiveness.
Boards and audit committees are providing more information on the important strategic matters within the audit committee remit, but this isn’t facilitating a quality dialogue with investors. Obtaining investor views on key matters such as audit tenders remains a challenge.
Reflections and questions
- Public discussions and evolving societal expectations seem to have been successful in getting companies to consider their impacts and dependencies on broader stakeholders.
- Do boards need to be bigger, to obtain the key skills, expertise and experience, to satisfy the need for diversity, and to populate their sub-committees?
- With an increasing focus on the culture within the company, should members of the audit committee (and board) spend more time visiting sites and talking to staff, to experience the culture at first hand?
- How can audit committees better communicate the rigour of their work in appointing external auditors and ensuring an effective and high-quality audit?
- How can the role of the non-executive director be made more attractive so that companies can recruit the right calibre of non-executive director to the board and audit committee?
- Does the UK’s Audit Committee Chairs Independent Forum (‘ACCIF’) need to be better promoted to engage audit committee chairs in discussions on policy and share ideas and best practice?
- Any reforms to the audit market need to be workable and practical, and not jeopardise the quality and effectiveness of the external audit.
- How can the UK viability statement be made more distinct from the going concern statement on the financial statements?
- Should a multi-stakeholder initiative be established to explore how to restore the company annual report as a key source of information for investors and other users?
Join the conversation on CA Connect
To discuss some of the issues raised in this article, please login to the CA Connect forum, an area exclusive to members. Here you can share your thoughts on this latest report and engage in discussion with ICAS Senior Policy Director, David Wood.