Newsletter | Volume 1

Rarely does one size fit all – but obviously this article will help those that read, understand and apply it. In addition to providing leading best practices in key areas of oversight, based on our experience this article offers 10 principles to help guide Board of directors, senior management and audit committees in their oversight of the financial-reporting process

Evaluation. Hire independent expertise to take a hard look at the Board, Management and audit committee’s charter, effectiveness, including its structure and direction. In short determine if there is too much or too little on the AC plate. Count on increased expectations for good governance and effective oversight, and focus on opportunities to develop. If you do not understand the basics right, your ability to ask the right questions and challenge management is critically limited.
Tone at the top and middle. Assess tone at the top and throughout the organization, including the effectiveness of compliance and antifraud programs. The economic downturn has placed considerable pressure on management to achieve operating results; at the same time, cost cuts and workforce reductions may have exacerbated these pressures. Promote a culture of compliance and financial-reporting integrity throughout the organization, and insist that the tone set by senior management is clear, unambiguous and consistent.
Financial reporting risk. Be proactive in focusing the agenda on what’s important—financial reporting risk—and make the most of the Board, Management and audit committee meetings. Ensuring that the agenda appropriately addresses the issues that require the Board, Management and audit committee’s attention can be a significant challenge. Develop focused (yet flexible) agendas, with an eye on the company’s key financial-reporting risks.
Risk management Assess the Board, Management and audit committee’s role in the oversight of risk management, with an view to clarifying the scope. The tremendous focus on risk today is an opportunity for the board to reassess the role of the committee (and the full board and other standing committees) in overseeing risk, based on the unique needs of the business and industry.
Accountability Question the continuing validity of key assumptions that underlie critical accounting judgments and estimates. Be up-to-speed on key financial-reporting issues and developments affecting the company. From fair value accounting, to the convergence of U.S. GAAP and international financial-reporting standards to critical accounting policies, judgments and estimates, an ongoing challenge for Board, Management and audit committees is to understand material financial-reporting issues and developments affecting the company. Take a close look at management’s key assumptions underlying all critical accounting estimates.
Transparency Insist on transparency, both external and internal—among the Board, Management and audit committee, and internal and external auditors. Good external transparency, i.e., from the investor’s standpoint, hinges on achieving internal transparency, including data quality and flow and communications between the board and management, auditors and other key players in the organization.
Communications. Focus closely on external financial communications—beyond official disclosures. Earnings releases often raise more issues because they contain critical business intelligence which usually does not come from the financial-reporting system, is not audited, and is not subject to ICOFR or disclosure controls. If you have not already done so, modify the types of earnings direction the company issues.
Cooperation with CFO team Make sure the CFO and the entire finance organization have what they need to succeed, and be sensitive to the strains on these organizations. In this highly charged and risky business environment, the demands of the economic crisis, resource constraints and pressures to meet performance expectations have all exacerbated the normal rigors of the CFO’s and finance team’s jobs. Board, Management and Audit committee approval of the CFO and finance team has become even more critical.
Change Management Help link change and risk management and monitor critical alignments (controls and risks). Change creates risk. During times of dramatic change, the risk of misalignment—of the company’s strategy, goals, risk, controls, compliance, incentives and people—goes up exponentially.
Independence from external Auditors. Last but not the least set clear expectations for external and internal auditors. In the past, in a 2 tier organization it was often the CEO who said that mr. XX is my president, rather than the other way around. The same applies regarding the Board, Management and AC interaction with the external auditors. The Board, Management and audit committee relies heavily on the insight, technical capabilities, judgment and independence of internal and external auditors, who together provide “checks” on management. Encourage (and expect) frequent, informal communications with the audit engagement partner.

Source: NACD Blue Ribbon Commission