In an effort to alert companies to the common pitfalls encountered by audit committees, ParenteBeard has released its "Seven Deadly Sins of Audit Committees." These considerations were based on research and feedback compiled during the firm's third annual Audit Committee Forum on November 29, 2012.
The forum, attended by prominent members of boards of directors and audit committees, intended to help each leader learn about the latest best practices for enhancing effective risk management strategies.
"Over the past few years, companies of all sizes have faced increasing regulatory pressures and scrutiny," said Phil Santarelli, ParenteBeard's chief risk officer. "Recent high-profile cases, like the one involving HP and Autonomy, have highlighted many of the traps that audit committees should avoid. If not mitigated, these missteps can lead to bigger problems in the future."
Avoiding the following seven "deadly sins" is critical to the decision-making process necessary to ensure the long-term success of the company, and to protecting individual members of the committee from being held personally liable:
1) Haste. Committee members, who are groomed to be problem solvers, pride themselves on being quick to decipher the puzzle and make a decision. Speed, however, does not trump the value of a well-thought-out solution. Haste in solving the problem often prevents sufficient time to effectively define the problem and look at it through various frames of reference (e.g., regulators, investors, analysts).
2) Rigidity. Committee members often deem problems to be binary decisions they must accept or reject. Viewing the decision as binary without understanding the root cause of the problem often leads to missing alternative, more effective solutions. Once rigidity in thinking is loosened, committee members often learn that the best options come from alternatives that live in shades of gray.
3) Naiveté. Committee members' decisions often can be highly influenced by how a solution is framed. Members must adopt a skeptical mind-set when hearing proposals, as naiveté can cloud the issues. It is important to look at proposals through objective lenses and resist peer pressure. Otherwise, members may miss other possible solutions.
4) Hubris. Committee members are experienced professionals, and that experience breeds confidence. Confidence, however, tends to grow more rapidly than experience. Conducting the research necessary to make a seasoned decision tends to be skipped over by members who are overconfident in their expertise. This hubris can lead to a failure to properly define the problem and identify the fundamental objectives, which can lead to an incorrect solution.
5) Stubbornness. People tend to stick to their first preference or opinion, leading some decision makers to seek out only supporting information that confirms their original premise. Stubbornness can cause members to ignore disconfirming evidence and different rationales. Open minds create more fruitful dialogues, resulting in more possibilities.
6) Assumption. This is the tendency to assume that the first-stated monetary value is accurate, even if it is not. Board members may then use this initial number when making future decisions. This can ultimately lead to misguided solutions and conclusions. Often, the initial monetary value is determined based on experience, history, and industry data, which may not be factually relevant to the specific situation.
7) Complacency. This is the tendency for members to rely on their memory to make decisions rather than conducting proper research for alternatives. When faced with situations similar to what they have seen before, members tend to fall back on past experience for the current decision, even if the situations are fundamentally different. Learning is a lifetime commitment, and complacency can prevent finding the best solutions.
ParenteBeard is ranked among the top twenty-five accounting firms in the United States. A leader in providing CPA and business advisory services to small businesses, middle market companies, nonprofits and SEC registrants, ParenteBeard has 1,100 professionals located throughout the Mid-Atlantic region. As an independent member of Baker Tilly International, ParenteBeard is proud to provide the highest level of service to clients nationally and internationally.
SOURCE: January 2, 2013, ParenteBeard Press Release