Author Archive

NACD Board Names Dr. Reatha Clark King Chairman

May 23rd, 2013 | By

On May 23, NACD announced the election of Dr. Reatha Clark King to chairman of our board of directors. While Reatha’s role as chair is new, her relationship with NACD goes back many years. She has been a member of NACD since 1993, an NACD director since 2005, and chaired the governance committee in recent years.

An unconventional path

Reatha’s directorship experience is extensive; she has served on the boards of ExxonMobil, Wells Fargo & Co., H.B. Fuller Co., Minnesota Mutual Insurance Co., and The Lenox Group—in addition to several nonprofit organizations. She has followed, however, what I would call an unconventional path to the boardroom. After earning undergraduate degrees in chemistry and math and later a PhD in chemistry from the University of Chicago, Reatha began her career in the sciences, working as a research chemist for the National Bureau of Standards, and then becoming a professor of chemistry and an academic dean at York College. After earning another degree—this time an MBA—she became the president of Metropolitan State University in Minnesota. Reatha was then tapped to head the General Mills Foundation, where she spent 14 years leading the company’s community initiatives. From there, she added the aforementioned board seats to her already impressive resume.

Preparing for 2020 and beyond

Looking ahead, Reatha’s experience in both the corporate arena and academia makes her particularly well-suited to guide NACD and its NACD Directorship 2020 initiative. NACD Directorship 2020 aims to help boards understand, define, and prepare for the emerging and evolving issues that will shape the future of directorship. It gives me great confidence that Reatha will be leading our organization as we prepare for 2020 and beyond.

I’m also honored that Barbara Franklin, who has led our board for the last four years, will continue to serve as a director until May 2014. Barbara has had a tremendous impact on NACD, overseeing our unprecedented membership growth during her tenure and helping us solidify our position as the authority on leading boardroom practices.

As I look at our excellent board of directors and management team, I am more confident than ever in NACD’s ability to deliver on our mission to advance exemplary board leadership.

NACD Spearheads Alternative Solution to Mandatory Audit Firm Rotation

June 22nd, 2012 | By

Next week, the Public Company Accounting Oversight Board (PCAOB) will hold its second public hearing on a proposed rule that would mandate audit firm rotation for all publicly traded companies. One concept the PCAOB has floated is a requirement that public companies rotate audit firms at least every 10 years.

The concept has been floated as a way to address flagging investor confidence in the ability of public audit firms to maintain strict independence.  However, the proposal could have an unintended adverse and far-reaching impact on public companies, not only for directors but also for executives, investors and shareholders.

NACD members across the nation are raising concerns about this concept.  In response, NACD is leading an initiative to engage the corporate governance community and propose an alternative solution—one that allows directors to retain their governance authority while also addressing what the PCAOB perceives to be a lack of investor confidence in the processes by which companies ensure auditor independence.

Audit quality and independence are important issues for directors, and reassuring investor and regulator confidence is a worthy goal.  But in our view, mandatory auditor rotation devalues and undermines the important role boards—and audit committees in particular—play in helping auditors maintain independence, objectivity and skepticism.

In our formal comment letter to the PCAOB, NACD expressed concerns about this proposal on behalf of our members and the entire boardroom community.  We objected to a mandated “one-size-fits-all” solution that would detract from the authority of the audit committee, supplant the board’s governance process and possibly generate unintended risk for the company.

The NACD was not alone in raising questions about the concept. The public comment period triggered a record-breaking volume of comment letters to the PCAOB and vigorous discussion at a roundtable in which NACD participated here in Washington last March.  Several roundtable panelists suggested that NACD was a key source to weigh in on board-level solutions, and the PCAOB noted that it would be receptive to our input.

The NACD Audit Committee Chair Advisory Council is spearheading this initiative, building a coalition comprised of investor representatives (including the Council of Institutional Investors) and the audit profession (including the Center for Audit Quality).   This coalition has a dual mission:

  1. Identify and evaluate with the corporate governance community an alternative solution to mandated regulations on auditor rotation.
  2. Promote this solution within the community and advocate its beneficial effects to the PCAOB and other influencers.

Our goal is to provide our recommendations and rationale to the PCAOB no later than December 2012, in anticipation of the PCAOB finalizing its recommendations in early 2013.

We need your input.  As a first step to formulating an alternative solution to mandatory auditor rotation, we are asking our 12,000 members to offer their own insights on how boards—and audit committees in particular—can apply leading practices to build investor and public trust.

Click here to provide your thoughts through a brief electronic survey. Responses are anonymous and will only be reviewed in aggregate form.

Your participation in this initial survey is a first step in shaping a framework for recommendations that will guide audit committee behavior and actions on matters of auditor independence, objectivity and skepticism.  These recommendations will be shared with the director and investor communities over the course of the coming months.

Ultimately, NACD will deliver these recommendations to the PCAOB by the end of the year, and we will position those concepts as representative of the will and the expertise of the public company directors and boards.

At NACD, we are committed to advancing and promoting best practices of companies to ensure proper board oversight that protects shareholders, investors and employees.

PCAOB’s Proposed Mandatory Audit Firm Rotation Misses the Point

March 20th, 2012 | By

Last year, when the Public Company Accounting Oversight Board began soliciting comments on ways that auditor independence, objectivity and professional skepticism could be enhanced through mandatory audit firm rotation, NACD felt obligated to share our perspective. While NACD agrees with the PCAOB’s initiative to improve company audits, instituting a term-limit system may be the wrong approach. View NACD’s comment letter at www.NACDonline.org/CommentLetter2011.

As the only organization serving as the voice of the director, NACD is aware of the burdens that mandatory audit firm rotation places on boards and businesses alike. The turnover of audit firms could undermine the board’s duty to evaluate the firm’s work as required under the Sarbanes-Oxley Act of 2002.

Auditor rotation may accomplish the PCAOB’s intended goals but it has not yet shown this process to be cost effective nor has it shown that it would enhance financial reporting. On behalf of NACD’s nearly 12,000 members, we’ve submitted a comment letter to the PCAOB on this issue, outlining our five major issues with the proposal as drafted.

1. The board and audit committee are uniquely qualified to evaluate the work of an audit firm.

The board of directors, and more specifically the audit committee, is best positioned to judge the effectiveness of an auditor. An audit committee will possess the necessary objectivity to make this judgment. Furthermore, the committee will understand the most important aspects of a company’s strategy, financial reporting and internal controls. As such, along with the board, the audit committee is uniquely qualified to evaluate the work of an auditor and, if appropriate, to renew the auditor’s contract of engagement. Limiting the tenure of an auditor through mandatory firm rotation would infringe upon the committee.

2. The board and audit committee have a statutory responsibility for the oversight of auditors. Mandatory audit firm rotation supplants this authority.

Reducing the board’s options to keep an existing auditor runs counter to the spirit of existing law. Audit committees are directed to appoint, compensate and oversee the external auditor. These requirements came from the implementation of SOX. The act established qualifications for audit committee members and delegated specific responsibilities to protect the shareholders’ interest in accurate financial reporting.

Mandatory audit firm rotation would supplant the statutory responsibility and authority of audit committees to select the best auditor for a company and oversee its work. The authority of the board and its committees is at the heart of the corporate governance framework, and reducing that authority would result in weakened oversight and guidance directors provide for U.S. companies.

NACD believes change should occur based on the performance of the auditors—not an arbitrary timeline. Boards of directors should constantly assess the value an outside auditor is bringing to the company. When performance is lacking, a board of directors must step in and make a change. This type of assessment takes time and effort, but boards and audit committees are dedicated to the task.

3. Audit firm rotation is unnecessary for objectivity, since there is already a requirement for mandatory audit partner rotation —as well as rules for auditor independence.

Under current rules implemented under SOX, there is a requirement to rotate the lead partner in audits every five years, with a cooling off period of another five years. Having a new audit partner in charge ensures objectivity. In addition, the audit profession has spent years defining ever more stringent rules to define auditor independence. It would be difficult in this day and age to find a single auditor or audit firm with conflicts of interest in relation to the audited client. This regulatory framework already ensures the objectivity desired by proposed firm rotation, rendering firm rotation unnecessary. 

4. Developing an understanding of the company may take auditors years to develop and to deliver the maximum benefits.

On a practical level, mandatory rotation may also reduce the quality of an audit. It is common knowledge that quality audits are dependent upon the auditors’ understanding of the company. As an audit firm’s institutional knowledge of a company grows, so does its ability to identify critical issues. This understanding often takes years to develop.

5. Mandatory audit firm rotation is disruptive and costly, particularly in special situations.

Mandatory rotation forces a change that may not only be undesirable, but is disruptive and time-consuming. This is particularly true in times of corporate change. For example, a need to change auditors during M&A transactions, corporate financing or a change in management could prove daunting. A confluence of events such as this would greatly expand the cost and difficulty of the transaction or transition and potentially hamper an effective audit of the company. The time and resources required for management and audit committees to manage all of these transitions would be significant. Moreover, the additional work required for a new firm to get up to speed would add cost and possibly delay to the audit.

Call to action:  Please join me contacting the PCAOB to let your voice be known.