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Shoring Up Financial Performance While Supporting Growth: Finance Committees in the Spotlight

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Publicly held company boards continue to mitigate a range of threats stemming from a prolonged recession, including a fluctuating base of investor confidence. In this business environment, the key question facing boards—and finance committees—is how to balance financial performance while also maintaining the spending needed to support future growth.

An increasing percentage of boards have finance committees separate from their audit committees—one in five according to the 2011 NACD Public Company Governance Survey. This is an increase from 2010 when the figure was 17.8 percent. Whether this increase is to supplement the audit committee’s role in overseeing financial reporting or to augment directors’ and executives’ analysis, the finance committee holds responsibility for some of the most important strategic decisions.

Ideally, members of the finance committee will be “financial experts,” defined as members with the ability to confidently read, analyze and understand key financial statements (the balance sheet, the income statement, and the cash flow statement). While most directors understand the basic concepts of the income statement (revenues minus costs equals income) and the cash flow statement (cash in minus cash out equals cash flow), the balance sheet is frequently more challenging, and involves a look at assets on one side, and liabilities and equity on the other, as of a particular date (normally the end of the fiscal year). Although changes in stock prices do not directly affect any of the three key financial statements, they do affect the company’s ability to raise more capital by selling stock through secondary offerings.

A look at some of the latest financial management trends shows how some companies are using cost cutting to achieve short-term improvements in their financial statements—including even their balance sheets (by increasing the cash component of their assets without increasing their liabilities)—hence building equity, at least in the short term. A recent article in the Arizona Republic, for example, details how shareholder-owned companies throughout Arizona are increasing cash levels by controlling costs, postponing expansion plans and holding off on hiring. According to the Republic, the companies analyzed “have emerged as healthier, more flexible and in greater control of their assets,” and are finding that allowing cash levels to build up is the safest way to play it.

However, the same practices that have allowed these companies to sustain wealth also display a reluctance to hire new employees and other limitations in capital spending that would spur corporate growth in the future. In his recent book, Saving Capitalism from Short-Termism: How to Build Long-Term Value and Take Back Our Financial Future, Alfred Rappaport (known as the pioneer of discounted cash flow and of shareholder value) warns against a myopic financial perspective.

Other companies are seeking out cost-effective solutions wherever they may exist. The Denver Post reports on a recent Global Business Travel Association convention, where an estimated 6,000 corporate travel managers met to discuss the best strategies for promoting business travel at a time when most companies have cut travel budgets over the past two years.

Although cutting costs while refraining from capital spending has thus far allowed corporate profits to remain relatively high, these answers will hardly be sufficient for the long term. With companies of all sizes adopting measures ranging from modest steps to drastic restructuring, finance committees are under increasing pressure to provide solutions and strategies for a corporation’s development.

At this year’s NACD Board Leadership Conference, the Finance Committee Forum will provide directors the chance to sharpen their skill sets in financial analysis and performance assessment, as well as the management of any changes in projected results. Sustaining and promoting a company’s viability in today’s economic market calls for a mature and educated perspective on how to keep business on track, with an eye towards future growth.

This year’s Finance Committee Forum will kick off with an Introduction to Financial Statements with Proctor and Gamble, followed by several presentations on value management systems and insights on how to create additional value for your corporation. The forum will conclude with an open discussion, allowing participants to recap the day’s lessons and converse with peers over their take on how the finance committee can best work to manage hardships and generate wealth.

To register for the NACD Board Leadership Conference, go to nacdonline.org/conference. Additionally, directors and executives from NASDAQ-listed companies will save 10 percent on the registration price by entering coupon code OMXSAVE. To register, or to ask questions in person, please email registration@NACDonline.org or call 202-572-2088.

 

Ensuring Accountability and Assessing Risk: All in a Day’s Work for the Audit Committee

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The current economic environment makes the role of the audit committee more important than ever. Conducting effective financial oversight amidst sweeping legislative reforms while monitoring market instability both abroad and domestically is no easy task.

Today’s audit committee directors carry some of the greatest responsibilities assigned to boards. Both investors and regulators continue to call for increases in accountability and transparency, and this duty increasingly falls on the audit committee.

August 12 was the official “Day 1” for the Securities and Exchange Commission’s (SEC) new Office of the Whistleblower, which began implementing the provision of Dodd-Frank requiring the Commission to pay rewards to eligible whistleblowers that provide the SEC with information on violations regarding federal securities laws that lead to enforceable action.

With an official “bounty system” in place, the stakes for risk oversight are higher than ever. Corporate employees have new incentives to forgo internal compliance procedures and directly seek out the SEC with any information they may have regarding financial securities violations.

The audit committee members play a key role in ensuring that their company has the necessary procedural systems in place to flag and manage potential federal securities law violations before SEC action is sought or necessary. Under Sarbanes-Oxley, the audit committee is required to establish procedures for the receipt, retention and treatment of complaints regarding any accounting or auditing matters. A company’s failure to flag securities violations has the potential to not only damage a corporation’s image, but increase legal costs as well.

Additionally, audit committees of companies listed on the New York Stock Exchange are responsible for discussing policies with respect to risk assessment and risk management. Some boards form risk committees to monitor risk. Indeed, under Dodd-Frank, this is required. However, NACD believes that risk oversight is a task for the full board and all its committees. Certainly, the audit committee can play a key role in identifying risks that impact financial report. These areas may include accuracy of business and financial statements and effectiveness of key business information systems and accounting controls, as well as legal and regulatory issues and the maintenance of ethical codes of conduct. That is a lot for one committee to handle.

This year’s NACD Board Leadership Conference will host an Audit Committee Forum, run jointly by NACD and KPMG’s Audit Committee Institute, which will offer directors who serve on audit committees the opportunity to learn from the best in the business and improve their own value to the boards on which they serve. The forum will explore the leading practices in audit committee effectiveness and help directors identify emerging risks. In addition, forum participants will get the latest updates on financial reporting and potential tax legislation and have the opportunity to engage in peer exchange discussions on topics of the utmost importance to committee agendas.

To register for the NACD Board Leadership Conference, go to nacdonline.org/conference. Additionally, directors and executives from NASDAQ-listed companies will save 10 percent on the registration price by entering coupon code OMXSAVE. To register or ask questions in person, please email registration@NACDonline.org or call 202-572-2088.

PCAOB Activity

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Following the most recent proxy season with a spotlight on executive compensation and the repeal of proxy access, boards now have a new area of focus—their relationship with auditors. An article in Wednesday’s Wall Street Journal, highlighted in NACD Directors Daily, reports that the Public Accounting Oversight Board (PCAOB) voted to explore whether companies should be required to rotate their outside auditors every several years.

According to the article, the vote represents the PCAOB’s first steps to establish term limits for outside auditors. The intent of the proposed change, which stands to sever the often long-standing relationships between companies and outside auditors, is to increase the independence of auditing firms and the quality of audits. However, critics of the  PCAOB’s proposed requirement believe it is not the best solution, creating inefficiencies for companies that have to educate a new auditor every few years.

It should be noted that this proposal is in the early stages—the PCAOB is currently accepting public comments until December 14, 2011. A public discussion on the topic is slated for March 2012, and any final rules will have to come with approval from the Securities and Exchange Commission.

In addition to the proposed audit-firm rotation,, the PCAOB issued a concept release on the auditor’s reporting model earlier this summer. In an attempt to increase transparency in the auditing process, the concept release offers several alternatives to the currently used processes. These alternatives include:

  • An auditor’s discussion and analysis;
  • Required and expanded use of emphasis paragraphs;
  • Auditor assurance on other information outside the financial statements; and,
  • Clarification of language in the standard auditor’s report.

The PCAOB will accept comments on this concept release until September 30, 2011. Submitted comments can be viewed here.