CFOs and the audit committee: partners for progress; A healthy dialogue between these two functions should create healthier organizations. The challenge now is to keep that dialogue going. The new Audit Committee Toolkit may be the answer.

The relationship between the CFO and the audit committee has matured rapidly as a result of recent scandals. Oftentimes there was minimal contact between the two; now, they are establishing almost daily interaction. This has had a substantial impact on how organizations are governed, which is probably for the best. The remoteness of audit committees in the past likely contributed to at least some of the corporate dysfunction we've seen in recent years.

The quality of the information shared is no doubt improving for another reason: financially astute board members must now be involved. Recent academic research on the tenure and experience of audit committee members reveals that members of the audit committee have, in the past, been among the least experienced of all board committees. This point bears out something we already knew anecdotally; that assignments to the audit committee were made to the "newbies" on the board because it was the least desirable of the board committees.

A renewed emphasis on the importance of audit committees actually began several years ago, led by Arthur Levitt, then chairman of the Securities and Exchange Committee (SEC). Levitt appointed the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (BRC). The BRC's recommendations were a first step in making a number of changes to the practices of corporate audit committees, and many of these changes were implemented by the two major U.S. stock exchanges.

The Sarbanes-Oxley Act of 2002 brought about new changes and requirements. A completely new paradigm for interactions between audit committees and chief financial officers is expected, characterized by:

1. A win/win scenario: While the audit committee needs to maintain healthy professional skepticism, the relationship between the audit committee and the CFO need not be adversarial. Recognizing each other as peers, with different backgrounds and skills to bring to the table, will result in a productive relationship that contributes to competitive advantage for the organization.

2. More frequent interaction: CFOs need to communicate with audit committees more frequently than they did in the past. Contact can't be limited to meetings; communications must occur more frequently and must address the financial, disclosure and audit issues that the company faces.

3. Two-way communication: The nature of communications must also change from being often a one-way street--a report from the CFO to the audit committee. Instead an ongoing dialogue should exist between the CFO and audit committee. The CFO should recognize the audit committee as a resource available to confront and discuss issues, seeking the most strategic outcome for the company.

4. The CFO taking on the role of a coach: While the audit committee should be comprised of individuals with significant experience in accounting matters, the CFO must sometimes take the role of coach, helping audit committee members understand how an accounting standard applies in that industry or that company. If the CFO engages in this role he or she can expect a richer debate and discussion with the audit committee members.

5. Organizations going beyond mere compliance: In the past, the audit committee often focused exclusively on compliance with the rules and regulations of the Ontario Securities Commission, the SEC and other regulators or debt holders. Now, that role will go beyond compliance to address governance issues, including the internal control structure over financial reporting, the internal audit team and its agenda, and the relationship between the CFO and the internal audit function.

In an effort to help audit committees do the job they need to do, the American Institute of Certified Public Accountants (AICPA) has created a how-to guide for audit committees, which is now available to CMAs. The Audit Committee Toolkit includes checklists, matrices, questionnaires and other materials that are designed to help the audit committee do their job effectively. The toolkit will further prompt audit committees to ask the tough questions critical for a complete and in-depth audit.

A sample of the tools include:

Audit committee charter matrix: This matrix makes the audit committee charter a living document by identifying the steps the audit committee must take to achieve each charter objective, associating the metrics with performance measures, and then identifying when each objective should be addressed, thus helping set the audit committee's agenda.

Tools for conducting executive sessions: Best practice calls for the audit committee to conduct an executive session with the CEO, CFO, controller, chief audit executive, director of financial reporting, general counsel, etc. This tool presents the hard and direct questions that the audit committee should ask each unique functionary.

Basics of internal control: Do audit committees really understand what internal control is and their role in the internal control system? This tool explains what internal control is and what it isn't, and presents example questions for the audit committee to ask that will help it gain a level of comfort (or not) with the internal control system of financial reporting in the organization.

Issues report from management: This is a tool for management to report to the audit committee about significant issues, estimates and judgments that the organization addresses in its financial statements. Management can summarize the issues in this report to use as a basis for discussion with the audit committee.

Given the renewed interest shown by banks, insurance companies, regulators and other stakeholders in financial reports, this 136-page publication is useful for all organizations, whether publicly traded, privately held, not-for-profit or other public interest entity.

Please note that this publication, is only available in English.

RELATED ARTICLE: How to order the Audit Committee Toolkit

The AICPA Audit Committee Toolkit was created to help audit committees do their job effectively. It includes a variety of programs, checklists, matrices and questionnaires that were designed to help the audit committee understand and execute their responsibilities. Audit committees using the toolkit should find that they are able to catch many problems and help their organization avoid financial reporting issues. The toolkit is for all organizations, whether publicly traded, privately held, not-for-profit or another public interest entity.

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To date, over 35,000 copies are in circulation.

Print versions (English only) of the toolkit are available for purchase from CMA Canada for CDN $20 (plus GST or HST). Shipping (by regular mail) and handling are included.

They can be ordered by calling the CMA Customer Service Centre at 1-877-262-6622 or by e-mail at [e-mail].

By John F. Morrow, CPA

John F. Morrow is vice-president of New Finance for the American Institute of Certified Public Accountants (AICPA).