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Feature

W. Ronald Dietz
Chairman, Audit and Risk Committee
Capital One Financial Corp.

Welcome to the Audit Committee!

Go ahead, curse your fate … and then come to grips with these 10 action steps for addressing the committee’s priorities in the coming year.

By W. Ronald Dietz

So … you’ve just been nominated to serve on the audit committee! After cursing your fate, you want to ensure that the committee is functioning as a forward-looking, strategic complement to the company’s overall governance rather than operating in a narrow, more traditional role. You also want the committee to be guided by the array of best practices that have emerged over the last few years.

Here’s a starting list of initiatives you might want consider to achieve those objectives:

1.    Examine the committee’s charter to ensure that it is significantly broad in scope. Does the committee, for example, have oversight for the full array of IT issues (only 49% of boards recognize responsibility for business continuity, only 39% for data security), for mission critical change initiatives (outsource programs, major systems projects, etc.), and for tax management? If not, start a dialogue among your colleagues about where oversight for these important functions should be domiciled.

2.    Ensure that internal audit reports directly to the committee and that the committee has meaningful say over hiring, budget setting, and performance reviews of the unit (the critical elements of a true reporting relationship). Perform an early assessment of the professional and managerial capacities of the most senior people in the unit.

3.    Get a third-party opinion as to what best practices are being observed by the committee and what improvements need to be considered.

4.    Develop a strong level of comfort with the quality and modus operandi of the external audit team. Confirm that the committee is responsible for selecting the next audit partner.

5.    Build rapport with your new best friend, the chairman of the finance committee, to understand the company’s liquidity position and to assess possible changes in that condition. Investigate the likely alterations in accounting rules affecting off-balance sheet assets and liabilities to gauge possible impacts on the company’s debt ratios, capital position, earnings, etc.

6.    Identify the five or six most important accounting rules that have the most impact on the company’s earnings or asset valuations. Each of these accounting rules allows certain latitude in reporting, so it’s important for the committee to make explicit decisions about where on the spectrum of choices the company is best positioned. Be alert for potential changes in those rules that could seriously impact present practice.

7.    Ensure the board has identified the top 10 risks facing the company and that responsibility for oversight of each is assigned to a specific committee of the board. A majority of really important risks do not lie in the traditional transaction areas of the company — e.g., credit granting, insurance underwriting, product defects, etc. They involve strategic, reputational, portfolio, and regulatory risks that are more subjective and harder to manage … but more substantial in their potentially negative impact. Underestimations of these more strategic risks by boards and top management have been responsible for much of the recent damage to our financial system, among other areas, so it’s critical that specific committees of the board assume oversight responsibility for identifying, measuring, and tracking these risks and for focusing the full board on actions that should be taken in each area. Implement appropriate steps within the audit committee to properly address the risks assigned to it.

8.    Assess the effectiveness of interactions between internal/external audit and line management, and move to address any problems. Ensure that all audit results are being addressed by management in a way that leads to sustainable corrective action.

9.    Recommend that a quality assurance function be established within internal audit, one that is responsible for selective audits of the auditors as well as the training of internal auditors, peer comparisons, and research into new methods and internal audit technologies.

10.    Study the company’s security plan and ensure that physical and financial assets are being adequately protected. Confirm that the security staff is functioning effectively.

Whether you serve on the audit committee as a chairman or member, these steps will provide a good understanding of what priorities should be addressed by the committee in order to be a more effective contributor to board governance. Discussions of these topics with other committee members can also form the teamwork so essential to considering important changes and to confronting future audit committee issues.

W. Ronald Dietz serves as chairman of the audit and risk committee of Capital One Financial Corp., where he has been a director since 1995. He is also CEO of W.M. Putnam Co., an outsourcing firm that assists nationally based companies in locating, establishing, and maintaining branch offices and retail stores across the U.S.

Mr. Dietz has a broad background in both general management and consulting. He has served as CEO of two financial services companies. He started his career at Citibank, where he moved through several senior assignments before managing Citibank’s operations in the Caribbean and northern South America. He holds an M.B.A. degree from Stanford University.

He can be contacted at rdietz@wmputnam.com.