What’s On Audit Committees’ Plate in 2008

KPMG's Audit Committee Institute has released a list of to-do's for audit committees this year, and CFOs will be glad to know that supporting the finance function ranks in the top five.

CFOs "are key to the responsibilities of the audit committee and financial oversight," notes Ed Smith, executive director of the Institute. "You want a CFO who's going to be there, who's knowledgeable and engaged and has the right resources.

"Boards in general are becoming more sensitive to the fact that CFOs are so stretched -- that maybe they're feeling unappreciated, and they find it difficult to get resources," adds Smith. "There's concern that if we go into a recession, companies will be tempted to cut costs, and some of those costs might be in the CFO's area because [finance staff] are not revenue generators -- they're viewed as a staff function."

Many directors are aware of the danger that might involve, however. "Let's say the CFO leaves; you've got the compliance burden and all the other things that they're being asked to do, particularly in a public company. And some of them are leaving for private equity, where they have less demands and they get paid better," Smith observes.

CFOs will be grateful for whatever support they can get, but they should realize that companies' internal audit functions are stretched thin, too. "We're being asked to do more, but we don't have enough resources," Smith says. "So we're going to have to ask, 'What do you want us to do first? Help us to prioritize.' Audit committees need to understand the demands on internal audit and the quality of the resources available to match those demands."

Here are the top five items on audit committee's must-do list, according to KPMG:

1. Be a catalyst for improving risk management and oversight. Enterprise risk management remains a focus for audit committees, but increasingly they are emphasizing the need to look beyond the process itself. "Somebody might give you fancy charts with risk ratings and so on, but you can't just stop there and say 'OK, I've got a process; it looks good, thank you,' and move on," says Smith. "It's important to get behind the process and understand the risks that are being identified, and relate that to the company's strategy and business."
Audit committees can help their organization identify gaps in its risk management processes and ensure coordination of oversight activities, according to KPMG.

2. Closely monitor management's disclosure committee. The subprime crisis is casting a harsh light on companies' disclosures. Management's disclosure committee plays an important role in supervising and evaluating key reporting processes, and audit committees should closely monitor its work. Audit committees should consider face-to-face meetings with leaders of the disclosure committee.

3. Be up-to-speed on fair value, IFRS, and other key financial reporting issues and developments. Keeping abreast of changes in the accounting and financial reporting environment is an ongoing challenge. Given the complexity of these topics, KPMG recommends that audit committees consider asking management to cover one key issue or development in detail at each audit committee meeting.

4. Make sure the CFO and the finance organization have what they need to succeed. Audit committees can provide valuable help with evaluations for finance staff and succession planning, and by helping to maintain the objectivity of financial disclosures.

5. Ensure that there's a shared vision for internal audit. Companies tackle this key task in different ways, Smith notes. "In some organizations there's a dotted line to the audit committee and a solid line to management; in other organizations it's flipped." But whatever the approach taken, "you want to make sure that everybody's on the same page -- that the audit committee, management, and external auditors understand what you're asking internal audit to do, and then also that the three parties are in agreement that they've got the resources to do what you're asking them to do."

Read KPMG's complete list of recommended actions for audit committees this year.