Ten To-Do's for Audit Committees in 2009

For most audit committees—public and private enterprises, not-for-profit and public sector entities—2009 promises to be a challenging year. The ten to-do's in this Accountability e-Lert are intended to stimulate audit committee members to think about their 2009 audit committee agenda, and the issues that they need to address.

Providing another perspective on some of the top issues in our to-do list, the Canadian Public Accountability Board (CPAB) hosted a January 22 webcast on the integrity of financial reporting in an economic downturn. Directed to audit committee members and board directors, CEOs, CFOs, and public accounting firms, this webcast covered financial reporting issues, including going concern assessment, asset valuation/impairment, the use of estimates, credit and counterparty risk, and the importance of financial statement disclosures given the current uncertainties in the economy. CPAB also outlined its expectations of auditors performing audits of public companies in the current environment and commented on the importance of performing risk-based audits with the appropriate use of professional scepticism. If you would like to view this webcast, we have included a link to it in the sidebar.

Ten To-Do's for Audit Committees in 2009

When considering and carrying out their 2009 agendas, audit committees should…

1. Closely monitor the impact of the financial crisis/recession on the company; focus on financial forecasts and early-warning indicators.
   Understand the recession’s impact on the company’s earnings, cash flow, liquidity, and compliance with debt covenants, and monitor key indicators of trouble. Ensure that management is monitoring the impact of the crisis on a “real-time” basis and developing (and stress-testing) worst-case scenarios. A strategic response to this crisis is critical.
   
   
2. Understand the company’s exposure to third parties in financial distress.
   Ensure that management is monitoring the impact of the crisis on the company’s key customers, suppliers, insurers, partners, banks, underwriters, counterparties, and other third parties that may be experiencing financial difficulty (or have filed for bankruptcy). An accurate and up-to-date inventory of the company’s potential exposure to third parties is essential.
   
   
3. Understand the impact of the financial crisis on the company’s financials—particularly the balance sheet.
   Focus on the company’s investment portfolio, including debt and equity securities, to identify declines in value or impairments that should be reflected in the financials. Help ensure that management has identified possible impairments of goodwill, deferred taxes, patents, and other intangibles, and that fair values determined by management and valuation professionals are reasonable. Understand how changes in financial markets have affected the valuation of pension plan assets and funding requirements.
   
   
4. Focus on fair value and liquidity disclosures.
   Understand the company’s disclosure processes for fair value accounting and liquidity issues, and how the application and impact of fair value accounting is described in the MD&A and other periodic filings. Consider whether the description of its liquidity risks is sufficiently robust and company specific.
   
   
5. Make sure your risk discussions with management are productive.
   With the benefit of hindsight and possible “lessons” from the financial crisis, consider the adequacy and effectiveness of the company’s governance processes for managing risk (management’s processes and the board’s). Be a catalyst in helping to pose the right questions, including: Can management provide a holistic view of the company’s major risks—both on and off the balance sheet? Is the risk information up-to-date? Are the top risks facing the company understood and agreed upon? How rigorously does management stress-test key risk assumptions? Are the board’s information sources sufficiently varied and objective? How does culture—including incentive compensation—affect the company’s risk profile?
   
   
6. Help the company and the board prepare for change.
   With the financial crisis and globalization changing the world in dramatic ways (a less-leveraged economy, a restructured banking/finance industry, potentially more regulation and shareholder activism on issues like executive compensation, new business models driven by technology, globalization, competition—and more), step back and consider what the emerging business environment will look like. Does management understand how this new environment will affect the company’s risk profile and the viability of its strategy and business model?
   
   
7. Actively oversee the enterprise’s changeover to IFRS
   Closely monitor the enterprise’s changeover planning, recognizing the potential scope, scale, risks, and enterprise-wide impact of this conversion. Clearly understand the financial reporting impact of management’s choices of accounting policies and elective exemptions. Examine the company’s ongoing MD&A disclosures and those of its peers and competitors. Understand how the changeover to IFRS will affect the organization and its stakeholders.
   
   
8. Take a hard look at opportunities to improve the audit committee’s effectiveness.
   Count on increased expectations for good governance and effective oversight, and focus squarely on opportunities to improve. Consider whether the information the audit committee receives comes from a balanced variety of sources (versus relying too heavily on information from management) and whether the information flow promotes sufficient internal transparency (versus fragmented or partial views). Getting the right information is essential to providing effective oversight of the company’s financial reports, its risks, internal controls, and finance team.
   
   Also pay attention to the basics—like having the right mix of committee member experience and skill sets, committee independence and leadership, an understanding of the company’s strategy and financial risks, and the adequacy of support for the audit committee. If you don’t get the basics right, your ability to ask the right questions and challenge management is severely limited.
   
   
9. Be sensitive to the strains on the CFO, internal auditor, and finance organization.
   In this highly-charged business environment, the demands of the financial crisis, liquidity and cash flow issues, possible resource constraints, and pressures to meet performance expectations have all exacerbated the pressures on CFOs and finance teams. Recognizing their critical role in guiding the organization through the financial crisis, support them by helping to maintain the focus on long term financial performance, injecting objectivity into financial disclosures, and ensuring the finance team has the right experience and resources (including budget) to do their jobs well in this tough environment.
   
   
10. Monitor the tone from leadership and throughout the organization.
    For most companies, 2009 will likely be a year of tremendous pressure and change—and a good measure of uncertainty. In this environment, it is more important than ever to be acutely sensitive to the tone from—and the example set by—leadership, and to reinforce a culture of compliance and a commitment to financial reporting integrity throughout the organization.

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