Time-poor audit committees can’t do it all
KPMG’s annual global survey of Audit Committee members always provides valuable insights into the thinking of board members. This year, with more responses both globally (1,500) and Australia (78) than ever before, there is again much for us to reflect on.
The greatest challenges nominated for companies in 2015 were perhaps not surprising – economic and political uncertainty and volatility, cyber security and technology and the impact of government regulation and public policy initiatives. This largely echoes the views expressed by business leaders in Davos recently.
But the real interest was on audit committees’ own concerns – notably a growing sense among many that they simply lack the time and often the expertise to function optimally.
Three-quarters said the time required to carry out their responsibilities has increased significantly (24 percent) or moderately (51 percent). Australian figures were 14 percent and 55 percent respectively. And the role has widened from the traditional oversight of financial reporting. Many audit committees say they now have at least some responsibility for other significant aspects of risk oversight such as cyber security and technology, global compliance, and operational risks, or the company’s risk processes generally.
Significant concerns were also expressed over information quality received by the audit committees from their companies. Asked which issues needed improvement in 2015, 51 percent of Australian respondents cited cyber security and 43 percent said the pace of technology change. As a response, Australian audit committee members admitted they needed to spend more time on these subjects – 58 percent citing cyber security and 60 percent technological change, along with 59 percent on the general oversight of the risk process.
Apart from more time, what else would help?
Nearly half of Australian respondents said more IT expertise on the audit committee would help its effectiveness and 45 percent said more ‘white space’ time for open dialogue would be of benefit. The third highest source of potential improvement (35 percent) was greater diversity of thinking, background, and experience. We too think diversity adds to the quality of process, thinking and outcomes.
Candidly, 16 percent of Australian respondents admitted their committees were not effective in assessing CFO performance while 26 percent (42 percent globally) said they were ineffective in their oversight of CFO succession planning. Nearly a fifth said interaction with the CIO needed improvement, while almost half had no significant interaction with the company tax director, perhaps curious given the topicality of tax issues.
There were also lessons for me, as Head of Audit, to reflect on. By far the greatest room for improvement by external auditors both here and globally are ones that we hear regularly through our own Client Insights program of interviews with directors. The survey confirmed that they really want auditors to offer industry-specific insights/benchmarking; keep the audit committee apprised of accounting developments and share with board members our views of the financial management team. That is something we as a firm are endeavouring to do. There was also a strong view expressed by the Australian respondents that the EU audit reforms, due to come in next year, will not help audit quality. This too is consistent with what we generally hear in the Australian marketplace.
The clear message out of this KPMG survey is that the audit committee can’t do it all. Overseeing financial reporting and audit is a major undertaking in itself, and the risk environment is clearly straining many audit committee agendas today. One-third of boards have recently reallocated risk oversight duties among the full board and its committees – the fact that more are considering doing so in the near future makes sense.
A lighter agenda for the audit committee can translate into more time for quality discussions and a deeper understanding of the business. But achieving it is easier said than done.
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