Audit committees are critical—but only a third of those sitting on one think they are effective
Good morning. Audit committees, which are often composed of directors with an extensive background in finance or accountancy, like CFOs, carry a lot of weight on corporate boards. And their workloads are increasing.
For example, in January, I wrote about the audit committee of U.S. agricultural giant Archer-Daniels-Midland Co. (ADM) leading an internal investigation into accounting issues related to the company's nutrition segment, which produces ingredients for both human and animal food. Pending the outcome of the investigation, the board placed the CFO, Vikram Luthar, on administrative leave, and Ismael Roig was appointed interim CFO.
ADM provided an update on Tuesday disclosing that a “material weakness” has been identified in its internal control over financial reporting in regard to accounting practices and procedures for intersegment sales. ADM also noted that it "continues to cooperate with the Securities and Exchange Commission and the Department of Justice in this matter,” according to the statement.
The ADM episode shows how the stakes for audit committees can get very high. But aside from such urgent matters, what challenges do audit committees face more broadly?
Enhancing efficiency
Deloitte's Center for Board Effectiveness and the Center for Audit Quality's latest Audit Committee Practices Report was released on Tuesday. The findings are based on a survey of 266 audit committee members, most of whom are from U.S. public companies with more than $700 million in market cap.
Most audit committee members know sticking with the procedural status quo is no longer enough. “One of the surprises to me was that only about a third of the audit committee members mentioned that they felt their committee was very effective and didn’t need to really make any enhancements,” Krista Parsons, Deloitte’s Audit Committee Program leader, told me. And about two-thirds feel there are things the committee could do to enhance efficiency.
Increased engagement of members during meetings, and improving the quality of preview materials and presentations were all named as ways that could boost effectiveness, Parsons said.
The top two priorities in the next 12 months are risk-related—cybersecurity (69%) and enterprise risk management (48%)—consistent with last year's results. But at a time when audit committees' responsibilities continue to grow and evolve, a third top priority wasn’t as clearly defined. Finding talent in finance and internal audit (37%), compliance with laws and regulations (36%), and finance transformation (33%), were clustered together.
“As I’ve been talking with audit committees over the past couple of years, there is definitely an understanding that there are more challenges when it comes to that talent gap, and that’s something they will continue to focus on,” Parsons said.
And 80% of respondents believe there is an opportunity for internal audit to add even more value, so they need the right talent to do so.
Regarding finance transformation, 66% of respondents said their audit committee has spent insufficient time in the past 12 months discussing AI governance. For finance chiefs serving on boards, this is top of mind. For example, Shannon Nash, CFO at Alphabet’s Wing, the on-demand drone delivery company, recently told me: “As a CFO and as a member of the audit committee of a public company board, I can view the role through both lenses. What I predict for 2024 is that CFOs will take a more company-wide holistic look at AI, especially generative AI.”
I asked Parsons what’s the most important advice for audit committees. “I always tell them that as you think about your agenda, always start with risk,” she said. “Make sure you’re not just rinsing and repeating the same agenda that you had. Think through the ‘what-ifs.’”
Sheryl Estrada
sheryl.estrada@fortune.com
María Soledad Davila Calero curated the Leaderboard and Overheard sections of today’s newsletter.
This story was originally featured on Fortune.com
