Survey Reveals Section 404 Compliance Results in Committee Agenda Refocus

A survey recently conducted by the Audit Committee Institute (ACI) of KPMG International and the National Association of Corporate Directors found that although a majority of audit committee members rate their committees as "very effective", many feel some improvement can be made-including oversight of accounting judgments and estimates, risk management and agenda setting.

While about 70 percent of the 317 audit committee members rated their committee as "very effective" and nearly 85 percent rated themselves "very effective" on ensuring the independence of external auditors from management and accountability to the audit committee, there is still room for improvement.

"With Section 404 compliance processes largely in place, we're seeing audit committees refocusing their agendas on additional oversight issues and activities they feel are most important." Ken Daly, executive director of KPMG's Audit Committee Institute adds, "Most audit committees have been keenly focused on their effectiveness over the past several years, and capital markets benefit from that focus."

Nearly one in three of those surveyed indicated they were not totally satisfied with the committee’s oversight of management’s accounting judgments and estimates, while 80 percent reported they were not fully satisfied with the board’s or audit committee’s oversight of risk management or the processes employed by management to identify and manage the company’s risks. The approach used to establish the committee’s agenda and work plan could use improvement, as well, according to nearly 40 percent of respondents.

“Audit committees are developing a greater appreciation for the tentative and ‘fragile’ nature of critical accounting judgments and estimates and their effect on the company’s financial statements,” Daly adds, noting that complex accounting standards and pressures to meet earnings estimates have contributed to the risk of errors.

Specific areas of risk identified as having room for improvement are:

  • Oversight of internal controls (36 percent)
  • Financial reporting implications of taxes (59 percent)
  • Fraud risk (61 percent) and
  • Information security (78 percent)

A majority of those surveyed, 84 percent, expressed concerns regarding the lengthy checklist of the audit committee’s more routine compliance activities may “detract from substantial discussion” of company issues and negatively impact their overall effectiveness.

“What we’re seeing in these survey results is a combination of healthy skepticism, with audit committees asking more probing questions about critical areas of oversight, and a real need to continue strengthening the financial reporting process overall,” Daly states.

Many audit committee members report they are generally satisfied with their interaction with and support from management, auditors and others, however, a considerable number say there is still room for improvement, with roughly one third of respondents saying support from the chief executive officer (CEO), external audit partner, in-house and external legal counsel, corporate secretary, and the full board could be better,

These ACI survey findings point to the areas of greatest concern to audit committees and the issues that are likely to shape their agendas for the year ahead,” Daly concludes. “For those supporting the audit committee’s oversight process – especially the CFO and internal and external auditors – this data paints compelling picture of where more time and effort could or should be spent.”

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