On June 19, NACD and partners KPMG’s Audit Committee Institute (ACI) and Sidley Austin LLP co-hosted the most recent meeting of the Audit Committee Chair Advisory Council, bringing together audit committee chairs from major U.S. corporations, key regulators and standard setters from the Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB), and Financial Accounting Standards Board (FASB), and other audit experts for an open dialogue on the key issues and challenges impacting the audit committee agenda.
As detailed in the summary of proceedings, the forum provided timely insights into a number of issues that are top of mind for audit committees. Key insights from the dialogue include:
As the PCAOB continues to focus on enhancing auditor independence, skepticism, and objectivity, audit committees are wrestling with how to make the best use of PCAOB inspection reports, with some questioning the timeliness and relevance of the reports and the use of the term “audit failure.”
Audit committees continue to discuss the potential value of more robust reporting from the audit committee and external auditors to provide greater insight into their work. Most delegates agreed that the auditor’s statement is the right area of focus.
Companies should be preparing for the impact of FASB’s “big four” convergence projects—revenue recognition, leases, financial instruments, and insurance contracts—with a particular focus on the lead time IT departments will need to implement systems changes.
Under new leadership, the SEC is refocusing on corporate accounting fraud and the quality of financial disclosures, while moving ahead with its already heavy rule-making agenda resulting from Dodd-Frank mandates and the JOBS Act.
The allocation of risk oversight duties among the audit committee, full board, and other board committees is receiving increased attention, as the risk environment becomes more complex and audit committees reassess their risk oversight responsibilities.
In their oversight role, directors serve in a part-time capacity, while management is full time, resulting in executives having a much deeper knowledge of the operational aspects and risks of the company. To overcome this inherent imbalance, directors should apply a “healthy” level of skepticism to the information and assumptions management provides.
The audit committee’s effectiveness hinges not only on having the right mix of skills and backgrounds, but also having a robust onboarding process and commitment to continuing director education.
For the full day’s discussion and proposed council action items, click here to read the summary of proceedings.
As summer nears, directors may have a brief respite from the frenzied proxy season following new financial regulations. However, the rest of the governance community kicks into gear, pushing to digest and summarize the past months. For example, this week on Fortune.com, a contributing post titled “Why corporate directors should thank Dodd and Frank,” examines proxy advisory firm recommendations and director reelections from this season. According to the article:
“The results so far just go to show that the consequences of reform legislation like the Dodd Frank bill can actually go in favor of corporate leaders rather than against them.”
The article praises the Dodd-Frank governance reforms, pinpointing the legislation as the impetus for a decrease in “no” recommendations from Institutional Shareholder Services (ISS). In 2011, ISS voted against 7% of Russell 3000 directors, down from 13% in 2010. Additionally, just seven directors failed to win majority support for reelection, a significant decrease from 107 in 2010.
While this decline is significant, the Dodd-Frank Act brought several additional provisions that the article did not address. As is often the case with legislative governance reforms, these provisions may bring unintended consequences that the boardroom is forced to accept. Although proxy access is still under judicial review, it has the potential to disrupt boardroom composition.
Establishing a boardroom with the “right” directors—those who bring the specific skill sets the board needs strategically and who also function effectively with constructive skepticism—requires a significant effort. This effort is a key responsibility of the board’s independent nominating/governance committee, which seeks to align board composition with the company’s long-term strategy. Directors nominated by shareholder groups, and not the nominating/governance committee may or may not have the experience needed.
The proposed Dodd-Frank whistleblower bounty program has also been subject to boardroom criticism. As NACD president and CEO Ken Daly testified to a House Financial Services Subcommittee last week, implementation of this program should be delayed for modifications. By providing financial incentives to whistleblowers for reporting directly to the Securities and Exchange Commission (SEC), the new bounty program could potentially harm the internal compliance channels required under Sarbanes-Oxley.
Despite boardroom apprehension leading into this year’s proxy season, the season has been relatively uneventful. In addition to the increased support for director reelection, Towers Watson reports that 90% of votes cast have supported companies’ say-on-pay proposals. However, these issues are just the tip of the iceberg, and it’s far too early to determine whether directors should be thankful for the Dodd-Frank legislation.