April 7, 2022
April 7, 2022
The “Great Resignation” and the related competition for talent have become a pain point for audit committees. While ensuring the finance organization, internal audit, and external auditor are appropriately staffed and trained is always top of mind, turnover and gaps can be particularly concerning when it comes to financial reporting risk and controls.
Audit committee members we’ve spoken to shared concerns about potential and realized control deficiencies due to such turnover—requiring probing conversations with chief financial officers, chief audit executives, and chief information security officers to diagnose the problems and set a path to shore up processes and controls. These conversations often center on new employees in control-owner roles or unfilled vacancies and the challenge of finding temporary staff or third-party solutions to handle such critical functions. The overarching challenge is addressing key talent gaps before they evolve into a financial reporting deficiency or material weakness to be disclosed.
In practice, companies tend to be reactive, not proactive, when it comes to hiring for positions related to internal control over financial reporting (ICFR). An analysis of approximately 24 million job postings between 2010 and 2017 by faculty at Indiana University’s Kelley School of Business found “a firm’s response to an internal control weakness is concentrated in the period immediately following the disclosure.” Moreover, they found, “internal control weaknesses change a firm’s demand for financial skills outside of corporate accounting and extend to other employees, possibly those that interface with the accounting information system or whose roles interact with a firm’s controls over financial reporting.”
Of course, the risk environment surrounding financial reporting is constantly shifting, and companies are always rowing against the current when it comes to talent. According to Audit Analytics, “accounting personnel resources” was the top internal control issue cited in adverse ICFR management reports in fiscal year 2020, followed by segregation of duties related to personnel within an organization. This has been the case for the vast majority of ICFR management reports over the last five years.
“These organizations have to be creative in filling gaps,” said one audit committee member during a panel at the KPMG Board Leadership Conference in January, stressing that the new work environment has required companies to reestablish a sense of community that inspires, attracts, and retains leaders and staff.
Both the finance organization and internal audit have been significantly impacted by the shifting risk environment, requiring those department leaders to assess whether their staffing and coverage plans are appropriate for the future. “We need to be looking to the future to assess whether there will be a change in skill sets relative to the service we provide,” said one chief audit executive at a KPMG-sponsored audit committee peer exchange in March.
While short-term solutions and quick fixes are hard to come by, talent-related inquiry can help the audit committee better understand the strategy and the progress being made. “It is not just the turnover of staff but, ‘Which staff?’ and, ‘How are you ensuring that your highest financial reporting control and risk oversight areas have stability and are protected from too much turnover?’” said another audit committee member at a KPMG-sponsored audit committee peer exchange in December.
The following lines of inquiry can help to enhance the audit committee’s understanding of talent risk:
Stephen T. Dabney is an audit partner at KPMG and leads the KPMG Audit Committee Institute. Michael A. Smith is an internal audit partner at KPMG and is the US Internal Audit Solutions leader.
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