In fulfilling its oversight role with respect to the company's accounting and financial reporting processes and systems of internal accounting, financial, and disclosure controls, audit committees can easily become the victims of information overload. The scarcity of time is cited by audit committee members as a significant factor in getting through all the information provided to them, since many of them also participate on other board committees.
The chair of the audit committee may be in a unique position to improve the productivity and effectiveness of the committee — and give back some precious time to the committee members.
By making an assessment of his or her committee members as to what kind of information they prefer and their preferences as to how they want to receive it, the audit committee chair is able to improve both the relevance (to the members) of the information provided and to reduce the time the committee members must spend in reviewing the information.
In working with the company's accounting and finance department and the committee members, the audit committee chair may be able to realize three synchronistic goals:
1. Reduce the time the committee members are required to spend reviewing financial data and other information.
2. Increase the effectiveness of the overall audit committee function.
3. Ensure the committee members' actions comply with their legal duties of care and loyalty.
Directors would generally agree that it is important to receive information far enough in advance of the meeting so that they can review it beforehand. Detailed documents, Power Point presentations, or just a sheet of paper with only the topic name are all too common practices today. However, given the differing personalities, backgrounds, and expertise of the board and committee members, there needs to be more than a “one size fits all” approach in providing information to make the audit committee's reviews more effective and efficient. What kinds of information do the committee members and directors want or need? What level of detailed information does an audit committee member require in order to fulfill his or her fiduciary duty?
This article answers those questions by providing specific examples and observations that the audit committee chair, committee members, and the company's financial management can apply to improve the productivity and effectiveness of the audit committee's oversight responsibility.
Assessment of audit committee members
There are many personality and behavioral assessment tools available for determining how individuals prefer to receive information and how they process this information. The assessment of individual personalities and behavioral styles may be one approach; however, the background and expertise of the committee members are generally the primary factor in determining the type of information they prefer and their preferences as to how they want to receive it.
While the approach may be less than scientific, segregating members of the audit committees (and boards as well) into the following categories is a first step in determining the most effective way to provide information to them:
⢠Members who are very experienced but who are busy with other elements of their career or personal life and want to spend the minimal amount of time that is required to fulfill their financial oversight responsibility.
⢠Members who are not interested in or knowledgeable of the technical accounting and financial environment but have a certain expertise (technology, risk management, specific industry, etc.) that is valuable to the committee and board.
⢠Members who are knowledgeable and interested in the detailed accounting and financial reporting (generally the “audit committee financial expert”).
Once the committee members have been categorized, a customization of the structure and content of the audit committee package can be examined.
Organization and content of the audit committee/board packages
The audit committee's charter more than likely specifically outlines many of the responsibilities of the committee, including reviewing the company's annual and quarterly financial statements, meeting with the company's independent auditors to review and approve the scope of their audit and procedures, and evaluating the auditor's performance. The charter may also require that the committee review the adequacy of the company's internal and disclosure controls and procedures and review any significant risks or exposures of the company.
The audit committee package can be tailored toward the information that the audit committee needs to have in order to understand the company's annual or quarterly results. The package should also address the required elements of the audit committee's charter. This package, over time, can become a work of art and one in which the committee members look forward to receiving and reviewing.
The standard components of the package, which may be delivered electronically via email or a secure portal, might include the following:
⢠Executive Summary: A one- to two-page summary of pertinent information such as highlights and lowlights of the quarter/period and any significant judgments applied, risks identified, and/or decisions made by management. As with any executive summary, the use of bullet points and reduced verbiage should be a goal. Detailed write-ups of certain elements referenced in the executive summary may be included as exhibits or attachments should the committee members want to read additional information.
While an executive summary will be a meaningful document for all the committee members, it will be especially appreciated by the experienced board member who has many other time constraints.
⢠Graphs and Charts: Graphs and charts that show trends are more efficient methods of communicating information versus long-winded sentences. Revenue and expense trends, other drivers of financial performance, as well as budget versus actual results, all represent data that can be presented graphically. Again, the details supporting the graphs and charts may be included as exhibits or attachments.
The use of graphs and charts supports the saying that “a picture is worth a thousand words.” Nontechnical committee members will be able to quickly grasp the information presented.
⢠Other Information, such as technical accounting updates, may be included as exhibits or attachments. The committee’s financial expert will appreciate the details of the technical pronouncements.
By having components of the audit committee package semi-tailored to the committee members' preferences and expertise, the contributions of the whole of the audit committee becomes much greater than the sum of its individual parts.
Positioned to perform
Making an assessment of each audit committee member as to how he or she would prefer to receive and review information, and customizing this information accordingly, is a first step in improving the efficiency of the audit committee. Working with financial management of the company to ensure that relevant information, including judgments of management, is well highlighted in the audit committee package, makes the committee's review more effective.
By working with the committee members and the company's financial management, the audit committee chair can ensure that the committee members are in a position to exercise their business judgment in the performance of their responsibilities. â
The author can be contacted at ksueredman@gmail.com.