Feb 18th 2010
As companies search for a path to growth and corporate board members express doubt that the U.S. economy can return to pre-crisis growth in the near-term, boards are putting their more immediate focus on risk management as they refine their oversight processes, according to new research by the Audit Committee Institute (ACI) of Big Four accounting firm, KPMG LLP.
"It's more than understandable that companies are struggling to grow in this economy, and it's also clear that risk oversight is at the top of the agenda not only for companies and boards, but for investors, legislators, regulators and others," said Henry R. Keizer, KPMG's global head of audit.
"Directors are clearly not getting swept away by rhetoric. Rather, they're reassessing the adequacy of their risk oversight processes as they help shepherd their organizations through an economic recovery, anticipated shifts in public policy, and regulatory reform," Keizer said.
Addressing risk oversight, new SEC proxy disclosures
In the ACI survey conducted during KPMG's Audit Committee Roundtables held in December in 28 U.S. cities, and attended by more than 1,200 board members and senior executives, more than half of the survey respondents said they are confident their board is prepared to disclose how it oversees risk in order to address the SEC's new disclosure requirements.
"There's growing recognition evidenced in our survey that risk oversight is a full board responsibility," said Keizer. "It's also a 'team sport,' involving every director and every standing committee."
Keizer noted that the focus of the audit committee, with regard to specific areas of risk, seems to be narrowing. Aside from its core responsibility for oversight of financial-reporting, some 70 percent said their audit committee has primary responsibility for oversight of financial risks (e.g., access to capital, cash flow, debt covenants), legal/regulatory compliance risk (63 percent), and IT security/privacy risks (58 percent). Only 18 percent said their audit committee has primary responsibility for oversight of strategic risks, suggesting that such responsibility rests with the full board.
Long road to pre-crisis growth
Mary Pat McCarthy, executive director of ACI and a KPMG vice chair, said, "Our regular survey with corporate directors and senior executives during our roundtables nationwide found that 45 percent of respondents said they do not expect the U.S. economy to reach pre-crisis growth in terms of investment, employment and productivity before at least 2013, and 22 percent said it would be beyond 2014.
"An even more pessimistic 17 percent said the economy would not see pre-crisis growth 'for the foreseeable future,' while 15 percent said recovery could come in 2011. Just 1 percent said recovery could occur in 2010," McCarthy said. Similarly, in a separate response, the majority (66 percent) said American companies will not return to "business as usual" and will operate in this new environment through at least 2013.
Impact of cost reductions
In the ACI survey, 45 percent of the respondents expressed concern about the sustainability of the cost reductions undertaken by their companies in response to the economic crisis. "Significant cost-cutting can create a variety of risks to the business, both near- and long-term," said McCarthy. "Our survey found significant concern in this area."
McCarthy noted that a majority of the ACI survey respondents (67 percent) said they were most concerned about the impact of cost-cutting on their company's employee talent and training. Other concerns include the impact of cost-reductions on internal controls (36 percent), fraud risk (25 percent), management of outsourcing and supply chain (24 percent), financial reporting integrity (21 percent), and the Foreign Corrupt Practices Act and compliance issues (9 percent). Some 13 percent of the respondents said their organization had not implemented significant cost reductions.
While previous recessions were characterized by short-term belt-tightening and a quick return to normal, current cost reductions may be much longer-term, and possibly permanent, McCarthy said, adding that, "Boards should consider if cost reductions went too far; whether internal controls may have been affected as a result; whether the organization has retained the flexibility to respond to changing customer and market demands; and whether cost cutting may have affected its talent pool for future leadership."
Preparing for public policy initiatives, economic recovery
Keizer added that boards also indicated concern about anticipated major public policy initiatives – including healthcare, the environment, energy, and financial services regulation – which will likely impose additional reporting, transparency and compliance obligations on a broad cross-section of companies and industries. "These reforms may require new or modified compliance, risk, and governance oversight processes," said Keizer.
The uncertain economic recovery notwithstanding, McCarthy said the majority of board members believed their companies were prepared for better times: 68 percent said they had confidence that their company was well positioned to take advantage of an economic recovery, while 27 percent said they were somewhat confident and 5 percent said they were not confident.
About the Audit Committee Roundtable Series
Launched in 1999, the Audit Committee Roundtable Series is hosted by KPMG's Audit Committee Institute (ACI) every spring (May/June) and fall (November/December). You can view KPMG's Fall 2009 Roundtable Report.