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7 Top Priorities for Audit Committees in 2017

Jan 12th 2017
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A new report from KPMG minces no words about the challenges ahead for audit committees.

Slow growth and economic uncertainty, business model disruptions, cyber-risks, more regulatory scrutiny, investor demands for transparency, and political and policy shifts will test financial reporting, compliance, and the risk and internal control environment, according to KPMG’s 2017 Audit Committee Agenda.

And that means “focused, yet flexible” agendas will be the order of the day for audit committees.

“Audit committees continue to shoulder heavy risk agendas,” Jose Rodriguez, partner in charge and executive director of the KPMG Audit Committee Institute, said in a prepared statement. “Exercising judgment about what does and does not belong on the agenda will be key to staying focused on the committee’s core responsibilities: financial reporting and disclosures, internal controls, audit quality, and continually improving the audit committee’s effectiveness.”

KPMG makes the following seven recommendations for audit committees to consider.

1. Non-GAAP financial measures should rank high on the agenda. In light of regulatory scrutiny, “have a robust dialogue with management about the process and controls by which management develops and selects the non-GAAP financial measures it provides, their correlation to the performance of the business and results, and whether the non-GAAP financial measures are being used to improve transparency and not to distort results,” the report states.

2. Monitor implementation plans for big accounting changes to come, especially the new revenue recognition and lease accounting standards. While the impact of the revenue recognition standard will vary, companies with large, complex contracts will face major accounting changes. Because new judgments and estimates will be used, audit committees need to ask about the process of how those are reached, the report states.

And as companies ready for the new revenue standard, they also have to deal with “wholesale changes” to lease accounting.

Together, the two standards “are not just an accounting exercise” to implement, the report states. It’ll mean audit committees should get updates on implementation status and any problems, stakeholder communication, and the adequacy of staffers assigned to the implementation.

3.Increase the focus on ethics, compliance, and culture. Compliance and monitoring programs should apply to all vendors globally, and should communicate ethical standards. If the audit committee doesn’t see all whistleblower complaints, what’s the selection process for those it does see?

“As a result of the radical transparency enabled by social media, the company’s culture and values, its commitment to integrity and legal compliance, and its brand reputation are on display as never before,” the report states.

Internal audit can help assess the organization’s culture.

4.Internal audit should focus on key risk areas and the adequacy of risk management processes. Internal audit is most effective when it focuses on critical risk areas and not just financial reporting and compliance, the report states.

Audit committees should “challenge internal audit to take the lead in coordinating with other governance, risk, and compliance functions within the organization to limit duplication and, more importantly, to prevent gaps,” the report states.

5.Monitor how regulators seek to increase transparency in the audit process. The Public Company Accounting Oversight Board is expected to issue a final standard on the auditor’s reporting model. It’ll still be a pass/fail model but will likely require a description of critical audit matters.

“An expanded auditor’s report would be directly associated with the company’s financial statements, so the implications are real,” the report states.

Also, the US Securities and Exchange Commission’s July 2015 concept release on changes to audit committee reporting requirements is still being considered, and it includes focus on the audit committee’s oversight of the external auditor.

6.Focus on the CFO and other leadership for quality financial reporting. A global survey indicates that almost half (44 percent) of audit committees didn’t believe their agenda was adequately focused on CFO succession planning, and 46 percent were only somewhat satisfied. Few were satisfied with how much focus there is on talent and skills in the finance organization.

“Given the rate of CFO turnover and the critical role the CFO plays in maintaining financial reporting quality, it is essential that the company have succession plans in place, not only for the CFO but also for other key finance executives – the controller, chief accountant, chief audit executive, treasurer – and perhaps the chief compliance and chief risk officers,” the report states.

7.Capitalize on the audit committee’s time together in and out of the boardroom. Accomplishments in the boardroom depend on time outside the boardroom, and that means visiting company facilities, talking to employees and customers, and considering outside perspectives – all of which help to understand the tone, culture, and rhythm of the organization, the report states.

Related articles:

Dialogue Must Continue on Non-GAAP Financial Measures, CAQ Says
How Audit Committees Can Assist in Revenue Recognition Efforts
Internal Auditors Turn Focus to Culture, Technology Risk
PCAOB Revamps Proposal to Enhance Auditor’s Report

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