Improving audit committee performance

October 2014

On September 25, 2014, members of the Audit Committee Leadership Network (ACLN) convened in New York for their 28th stand-alone meeting. One of the sessions was a members-only discussion on how audit committees can improve their performance in the face of mounting challenges and demands from different stakeholders, including regulators who see audit committees as important gatekeepers for protecting investors and the public.

This ViewPoints presents a summary of the key points, along with background information and selected perspectives that members and subject matter experts shared before and after the meeting.

The ACLN members touched on four main topics in their discussion of audit committee performance:

  • Audit committee focus of attention
    An effective audit committee has to focus on the most critical issues, and these have expanded well beyond financial reporting. Audit chairs listed cybersecurity and risk management more generally as areas that have risen to the top of their agendas in recent years. Meanwhile, compliance with regulations, concerns about the quality of operations, and oversight of activities in remote locations continue to be a challenge. The broad range of issues that many audit committees oversee today means that they must always be ready for unexpected yet time-consuming situations, such as a serious cybersecurity breach or an investigation of compliance lapses.

  • Audit committee composition and education
    Financial expertise continues to be essential on the audit committee, and having more than one financial expert is helpful. Yet members were unanimous in asserting that audit committees need more than financial expertise to deal with their current responsibilities. Qualifications such as strategic and operational experience, industry expertise, and geographical knowledge are also important, as is the ability to look at financial issues from a non-technical perspective. These requirements mean that a program of ongoing education and training for members is highly recommended.

  • Emerging good practices
    Audit chairs mentioned a number of specific practices that can help boost the audit committee’s performance. They can encourage engagement from other members of the committee by having them assume responsibility for areas in which they have expertise and by holding more executive sessions with only committee members present. Audit chairs also recommended ways of keeping committee meetings more focused, such as asking management to summarize and condense meeting materials and taking care of less critical issues in interim reports. To ensure good communications within the committee and with other  relevant groups, audit chairs recommended frequent and open dialogue with management, internal audit and external audit, and broad outreach within companies to understand what is going on.

  • Evaluation of audit committee performance
    Most audit committees conduct annual evaluations, which can be led by the audit chair or by the lead director as part of an overall board evaluation. Some members said that bringing in outside parties can be helpful, while others were skeptical. Evaluation tools often include surveys, but members underscored that frank discussions are the most helpful, and input should be solicited from management and the auditor. Members were open to the idea of disclosing the process used for evaluations (though not the results), as recently requested by the Council of Institutional Investors.