Believing that a rising tide lifts all boats, members of the Audit Committee Leadership Network in North America are committed to improving the performance of their own and – through the publication of the ViewPoints synthesis of insights generated in their meetings – other audit committees.
Members are also committed to explaining the work of audit committees through dialogue with stakeholders like the Securities and Exchange Commission, the Financial Accounting Standards Board, the Public Company Auditing Oversight Board, and the investment community. The network is supported by EY.
Network members also meet to explore common issues with other Tapestry networks such as the Compensation Committee Leadership Network and the European Audit Committee Leadership Network.
Recent network topics:
Evaluating the work of the external auditor is a core responsibility of the audit committee, although there is no single set of metrics that universally indicate a high-quality audit. Members of the Audit Committee Leadership Network agreed that the starting point is a relationship with the audit partner and team built on honest communication. Audit committee chairs find value both in determining what makes for a high-quality audit at their companies and how to best assess whether their auditors are meeting that standard. As external stakeholders pay greater attention to the audit committee’s responsibilities, reporting on the oversight of the external auditor will only increase in importance and should remain a discussion point for audit chairs.
Audit chairs discussed relations between the board and the chief information security officer (CISO) with Dr. Andy Ozment, co-CISO at Goldman Sachs; Frank Price, vice president and CISO at CVS Health; and Joe Sullivan, chief security officer at Uber. Participants touched on how CISOs are positioned within companies and the issues boards should raise with CISOs, such as the top risks the company is facing and the security framework being applied. They also noted the importance of direct communication between the CISO and the board, using language understandable to non-technical directors.
A substantial group of large public companies are allocating a growing share of their income and cash flow to buying their own stock on the open market. ACLN members said that buybacks are popular for companies with cash on hand because of the low cost of capital, the perception that share prices are undervalued, and the dilution caused by equity compensation plans. They noted, however, that buybacks are not a priority when compared with reasonable opportunities for profitable growth.
Russell Golden, chair of the Financial Accounting Standards Board (FASB), joined ACLN members for a discussion of the FASB’s operations and agenda. Mr. Golden explained how the FASB works and its relationship with the Securities and Exchange Commission. He reviewed current standard-setting efforts and the FASB’s collaboration with overseas standards setters. The discussion also touched on the expanding use of non-GAAP reporting. Mr. Golden encouraged audit chairs to get more involved in the FASB’s standard-setting process and to consider joining its advisory council.
Bart Friedman, a senior partner at the law
firm of Cahill Gordon & Reindel, joined ACLN members for a discussion of
how audit committees oversee special investigations. Mr. Friedman and the members discussed the
decision to launch an investigation and reviewed the criteria for hiring
outside counsel. They discussed
communication with other board members, management, and the external
auditor. They also addressed the issue
of self-reporting to the government and to the broader public, including
A panel of institutional investors joined the audit chairs to explain investors’ perspectives and needs regarding public company disclosures, especially disclosures about the audit committee and the board. The group also discussed how engagement between boards and investors can supplement disclosures. In a separate session, representatives of General Electric joined the group for a discussion of how GE revamped its proxy statement and 10-K, overcoming both internal and external challenges.
Faced with the task of voting on many companies’ proxies in a short period of time, institutional investors of all sizes continue to rely upon ISS and its competitors for both proxy voting advice and execution. ISS’s reach is only expanding as it grows beyond its proxy advisory services into a global governance company. In a meeting with ISS President Gary Retelny, ACLN members recognized the importance of developing a relationship with ISS, both to ensure that their voices are heard in its policy process and to serve as a check on the accuracy of its work. Mr. Retelny, for his part, encouraged board directors to play that role and participate in the process.
ACLN members see room for improvement in enterprise risk management (ERM). Engaging the CEO has a major impact, though ERM should be embedded in the operational management of the business.Desktop exercises, data analytics, and surveys help identify risks and evaluate response plans, but ERM should take into account that some risk taking is desirable.The board should help the CEO focus on the most important risks, interact directly with those who are managing risks, and delegate responsibilities across board committees effectively.
On March 10–11, 2015, members of the Audit Committee Leadership Network (ACLN) met in New York to discuss key accounting issues such as the revenue recognition standard, Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) audit committee-related matters; share ideas among themselves for improving enterprise risk management; and conduct a deep dive into the opportunities and risks resulting from oil price volatility.
Audit chairs continue to stay focused on how the audit committee can be more effective in the face of increasing demands. Of concern are the issues they should prioritize, and the qualifications and education audit committees need to address those issues. Directors described practices they have found helpful in engaging committee members, digesting information, and communicating with management and the auditor. The audit committee should evaluate its performance through both formal surveys and more informal dialogue.
Mr. Joseph Demarest, head of the Cyber Division at the Federal Bureau of Investigation, joined audit committee chairs for a discussion of cybersecurity threats and how companies should respond. They touched on preventative measures and incident response strategies. In addition, they learned about the government’s efforts on cybersecurity, including how the government and the private sector can work together. Mr. Demarest and the members developed a set questions audit committees can ask management about cybersecurity.
ACLN Members were joined by Mr. Mason Morfit, an activist investor with ValueAct Capital, and Mr. Andy Merrill, senior managing director at Teneo Strategy, to discuss today’s activist investors and how companies and boards should respond to them. Companies are preparing more carefully in advance potential activist interventions. They are also engaging closely with activists when they appear, considering their ideas with an open mind and even considering them as board members when appropriate.
Audit Committee Leadership Network in North America
Audit Committee Chair, PPG Industries