The importance of the audit committee (AC) chair’s leadership—in setting the committee’s tone, work style, and agenda—is vital to the committee’s effectiveness and accountability, and cannot be over-emphasized. In our experience, the most effective AC chairs are fully engaged—recognizing that the position may require their attention at any time, and often beyond regularly scheduled meetings; they understand the culture of the organization; they set clear expectations for committee members, management, and auditors; and they ensure that the right resources are being employed to support quality financial reporting.
To provide effective leadership, the AC chair must have a clear understanding of the committee’s duties and responsibilities; be able to commit the necessary time (which will vary, depending on the size and complexity of the business); be readily available on urgent matters and in times of crisis; and have the requisite business, financial, communication, and leadership skills.
Setting the agenda
The AC chair plays a critical role in focusing the agenda on what is important: quality financial accounting and reporting and effective internal controls. The AC’s rolling 12–24 month agenda should align with the responsibilities set forth in its charter while also allowing flexibility to address emerging issues.
Making the most of audit committee meetings
The AC chair plays an important role in ensuring both the quality and timeliness of premeeting materials. For the committee to make the most effective use of its time together, all committee members should receive and review materials prior to the meeting—and make requests for additional information in advance—so that members can devote more time during the meeting to discussion.
Many AC chairs conclude each AC meeting with an executive session so that AC members have an opportunity to discuss important matters privately without management present. The AC may also choose to hold private sessions with the CAE, CFO, external auditor, and other senior executives who can provide valuable insight to the committee about the challenges facing the company.
Aligning and coordinating AC oversight activities with the board and other committees
In recent years, we have seen a number of changes in how boards—through their committee structure—oversee risk. One major change is a general recognition that risk oversight is a responsibility of the full board—not the responsibility of any single committee, such as the AC. A second change we see is the emphasis on ensuring that risk oversight responsibilities and activities are appropriately allocated and well-coordinated among the board’s committees—and reducing some of the burden on the AC. That might call for an additional board committee(s), such as a technology, finance, compliance, or (for banks) risk committee. To balance the workload, we see boards assigning specific risks to these committees (e.g., cyber risk to the technology committee), and we also see boards reassigning risks among their three mandatory committees.
As a result, AC chairs are playing an increasingly important role in ensuring that the risk oversight activities of the board and other board committees are properly coordinated with the AC, and that the AC has the necessary skill sets.
AC chairs work with lead directors and nominating/governance committee chairs to ensure that:
Possible approaches to improve coordination and reduce the risk of a balkanized board/committee structure include:
Understanding the business and its inherent risks
A key role for the AC chair is to ensure that all committee members understand the critical risks to the business—risks to its strategy, its business model, or its survival.
To that end, many AC chairs:
In light of the #MeToo movement, many AC chairs are taking deeper dives into culture and behavioral risks. To that end, ACs are probing HR for cultural and behavioral data (employee surveys, turnover rates, and exits exit interviews, etc.) beyond what has historically been provided regarding ethics, compliance, and whistleblower hotline complaints.
Understand that the role of the CFO has become much more complicated, challenging, and demanding in recent years. A critical role for the AC chair is to support the CFO and develop trust before there is a crisis.
AC chairs can support CFOs by:
Setting clear expectations for internal and external auditors
Because external and internal auditors play a vital role in the financial reporting process, effective oversight of auditors is a core responsibility of the audit committee.
Under the Sarbanes-Oxley Act (SOX), the AC of all U.S. public companies is “directly responsible for the appointment, compensation, and oversight” of the external auditor, including the resolution of any disagreements between management and the auditor regarding financial reporting matters. In fact, many ACs are emphasizing their ownership of hiring and firing decisions regarding the external auditor. A good working relationship between the audit committee chair and the lead audit engagement partner is essential—both to the AC’s effectiveness and to the effectiveness of the engagement team.
An important responsibility of the AC chair is to ensure that the AC devotes sufficient time to:
AC chairs often help to clarify the role of IA:
AC chairs need to be consulted on CAE performance, compensation, and hiring and firing decisions.
To be effective, the AC chair should be a strong leader by:
Assessing the tone at the top and throughout the organization
As boards increase their focus on the company’s culture and values, commitment to integrity, legal compliance, and brand reputation, AC chairs are encouraging their committees to take a harder look at the company’s “capital R risks”—tone at the top, culture, and incentives——all of which are critical to the integrity of the financial reporting process.
Areas of focus include:
Emphasizing continuous improvement for the AC
AC chairs recognize that AC effectiveness is an evolving process that requires staying abreast of fast-changing business developments so that the AC has the knowledge needed to evaluate the information it receives and on which it is basing its decisions.
Ensuring that the AC has the “right” composition and dynamics
The chair should consider the dynamics of the AC. An important question for the AC chair is, “how do AC members interact with each other, with the chair, and with the board, management, and auditors?”
The chair should also consider the overall AC composition (ensuring the committee includes the “right” mix of people with the appropriate mix of hard and soft skills).
The AC chair needs to work closely with the chair of the nominating/governance committee in the AC member selection process to assess: