Audit committee leaders face increasing workload.
The committee and its members meet stiff, independence rules; have a charter to regularly review; face strict limits on consulting or other outside income from the firm; and must include at least one "financial expert." It must also meet regularly with outside auditors, minus management. These are only the basic headings in a huge and growing list of audit committee "shalls" and "shall nots" that its chair must ensure.
"SOX [The Sarbanes-Oxley Act of 2002] has clearly put some real definition into the role of the committee," observes James T. Brady, chair of the audit committee at Constellation Energy Group.
"If you look at the typical [audit] committee charter from before SOX, they typically were about a page and a half in length. Now, they usually run seven or eight pages."
The time demands on the audit committee chair have likewise risen. In a 2007 survey, executive-search firm Spencer Stuart found the average large-company board's audit committee met 9.5 times a year--more frequently than the full board. The survey also found the number of audit committee meetings ranged up to 41 at one firm; and that a third of audit committees met 11 or more times yearly.
The average time commitment for a committee chair ranges from 10 to 25 hours per month, most of which is spent on the telephone "with management, independent auditors, the head of internal audit and with committee members," says Westfield Cos. audit committee chair James Boland. (This telephone time is in addition to the frequent in-person sessions.)
"One of the great misconceptions is that you just add up the time in meetings," notes Brady. "What's really big is the time required in between; the background work. What SOX did subliminally was to change the description of board audit committee service from an honorarium to a real job."
Power of the Agenda
How does an audit committee chair cope with what's threatening to become a dangerous, punishing full-time job?
Barbara Hackman Franklin has some comments on this subject. Franklin is audit committee chair for The Dow Chemical Co. and Aetna Inc. She also serves on three other audit committees.
Any job becomes more manageable by planning as far ahead as possible, says Franklin. "Set your meeting schedule at least a year ahead, and plug in the items you need to do." On the committees she chairs, Franklin sets an annual planning session with the outside and internal auditors, chief financial officer, controller and general counsel to shape the next year's audit calendar and committee schedule. Besides smoothing work flow and boosting committee efficiency, setting the schedule limits surprises, she notes.
Good use--rather than abuse--of time spent on presentations is even more important for the audit committee, and Franklin keeps' a tight rein on what she deems "PowerPoint madness." She requires "no presentations that regurgitate what we've already read."
On Franklin's boards, she says it helps if the committee gets a handful of key visuals to follow along with presentations, rather than to doze through a long slide show.
The committee chair has this "power of the agenda," and perhaps in no other board role is its wise exercise more crucial.
"Being chair of an audit committee requires you to stay in control of the agenda for meetings, not just responding to prearranged items from management," says Constellation Energy's Brady.
"You have to make sure you're focusing on the right areas, rather than just compliance," adds Boland. This applies "not only to the agenda, but also to the issues."
Such a firm hand from the committee leader is vital, not only to manage a heavy, strictly regulated workload, but to set the tone at the top that is demanded of new auditing standards.
The chair is typically also filling the audit committee requirements for "financial expertise," and this concentrates the workload unequally. Audit chairs more than ever must delegate to other committee members. Fortunately, committee expertise is catching up with this demand, as Spencer Stuart found in 2008 that 99.4 percent of boards in the S&P 500 have identified a financial expert on their audit committee. Such bench strength backup for the chair is more crucial on audit than other committees.
Indeed, some audit committees are electing a vice chair, who will succeed the current chair and who can also fill in, as needed. This vice chair can serve as a lieutenant, and will likewise need financial expertise.
Among large public companies with complex, diverse financial systems, audit committees with all members qualifying as experts is growing more popular.
The simplest method of landing a financial expert on any board is to go fishing where there are a lot of them. Financial Executives International (see sidebar on page 31), and other auditing- or finance-related professional associations, are a rich resource. Major business schools (especially those with governance programs) may also have some strong prospects in mind.
Audit Committees of the Future
More boards are seeking targeted auditing expertise. A few years ago, it was fine to chair the audit committee simply because you rotated into the slot. Today, financial literacy--see box above--is required.
Tomorrow, however, those wanted will be "people with much greater depth in financial accounting or audit" says David Sinason, an accounting professor at Northern Illinois University and author. Look for "more people with specific auditing experience to head the committee," he predicts.
Audit is a specialized field, and accounting or finance background just isn't the same. Furthermore, corporations in the finance, insurance and health-care sectors, for example, have very differing accounting, disclosure and regulatory climates.
Even a long-experienced finance pro who takes over as audit chair will not be able to monitor all industries with equal facility.
Committee chair selection trends reflect this need for specific talents. All other board leadership positions--even a separate chair--are usually elected due to subjective qualities, such as mutual respect, past achievements, a portfolio with a major company or just being the best liked. The chair of the audit committee is the only board leadership role that demands a particular resume and set of skills.
A survey by The Institute of Internal Auditors found that the nominating and governance committees take a stronger role in vetting and selecting audit chairs than they do vetting selecting the chairs of other committees. Indeed, 58 percent of these chairs are named by nominating and governance, whereas most other committees just pick a leader from among their members.
Audit committee chairs are excellent organizers. With far more to do, and more formal oversight and certification duties, the committee's agenda is now full. The committee also has much tighter deadlines for filings and disclosures. Yet for the right personality, "it's not really that demanding," says Stephanie Shern, audit chair at Scotts/Miracle Gro and two other boards. "I'm an organized person, and I like to get the committees organized for a year in advance," she says.
Brady, who chairs three other committees besides that of Constellation Energy, says it's "helpful to be on multiple audit committees; you can bring lessons learned, and that adds real value."
interviews with audit committee leaders confirm a trend of people retired from long careers in audit or finance chairing multiple audit committees--and doing it well. Former audit firm partners (such as Brady, retired from Arthur Andersen), in particular, have expertise in being able to dig deeply into one company's numbers one week and then smoothly shift focus to another firm's books the next week.
Brady says after his years with Anderson "asking tough questions, it wasn't an unusual transition to the audit committee role."
Such "professional" directors, who bring their targeted leadership skills to several boards, may be the next governance trend.
Another attribute of the truly gifted audit committee leader is the ability to look beyond the numbers. "Before SOX, the audit committee had a passive review function," says Peter Rossiter, an attorney with the firm Schiff Hardin. "Now, it plays a much more active role."
The committee has been handed a variety of added oversight functions that go far beyond a basic balance sheet, he explains. Indeed, a committee chair solely with accounting training may overlook some of the new demands, which include: estimating and reducing potential risk and liabilities; judging internal controls; assuring proper disclosure policies; and performance.
CFO/Audit Committee Relationship
All boardroom leaders depend on company staff to execute their jobs well, but the audit committee chair may be the most reliant. Internal audit staff (if any), outside auditors and legal counsel are vital, but most day-to-day information and gate-keeping is through the CFO. The best committee chairs build strong, trusting relationships between themselves and the CFO.
There are often some obstacles to overcome. A look at some common problems can help the audit committee leader make this relationship more effective.
For starters, read the information the CFO has so laboriously prepared for the audit committee prior to the meeting. "The finance group spends a lot of time putting this together, and the committee really needs to grasp it," says Colleen Cunningham, managing director for Resources Global Professionals and formerly president and CEO of Financial Executives International.
Having the chair and all committee members review the report in advance benefits both sides of the relationship. Directors won't brush aside their unopened financials at the meeting and say, "give us the bottom line," which, she says, irritates everyone. For their part, CFOs won't need to give the committee a mind-numbing recitation of all the numbers.
Cunningham finds that, while audit committees are often over-whelmed by the new demands on public companies, CFOs and their staffs face far greater pressure. Boards can help by making information flow a two-way deal.
"The board and audit committee can provide the CFO with their experiences outside the company, benchmarking and information on how other companies are dealing with the changes."
Susan Shultz, president of The Board Institute, an advisory firm, finds that smart audit committees and their chairs pick the CFO's brain for strategic insights. "The CFO is often treated simply as a technician ... it's critical that the board realizes the CFO has a strategic role."
The CFO can also be the committee's facilitator for its ongoing training needs, both as an internal tutor and as a contact for outside talents.
Shultz counsels committee chairs to learn their CFO's strengths and weaknesses. "The CFO may be especially strong in dealing with the street, or with the technical accounting side."
A knack for being able to read the CFO's talents is important to the audit committee chair's own effectiveness. This chemistry--between the CFO and audit committee chair--can be a checkbox item when evaluating both the CFO and the chair.
The role of audit committee chair has become increasingly demanding--considering hours spent, expertise required and an expanded list of dos and don'ts. Coping and avoiding surprises can be accomplished through tight control of the agenda and planning as far ahead as possible.
RELATED ARTICLE: Audit Committee Financial Experts
Under The Sarbanes-Oxley Act, Section 407, a company is required to annually disclose whether it has at least one "audit committee financial expert" on its audit committee and, if so, the name of the expert [and] whether the expert is independent of management.
The U.S. Securities and Exchange Commission rules define the term "audit committee financial expert." This expert should:
1. Understand financial statements and generally accepted accounting principles;
2. Be able to assess their application in connection with accounting for estimates, accruals and reserves;
3. Have experience "preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are that are comparable in scope and complexity to those of the company."
4. Be familiar with internal controls and financial reporting procedures; and
5. Understand the audit committee functions.
RELATED ARTICLE: FEI Directors' Registry
FEI National Career Services hosts a registry of audit committee board candidates with exceptional qualifications. The goal of the registry is to assist corporate boards in complying with requirements and helping to improve audit committee governance. It serves corporate boards and executive search firms by helping them find qualified candidates for positions and it also aims to help senior-level financial executives advance their careers. The registry currently includes more than 1,600 names.
How the Registry Works for Search Firms/Corporations
Corporate boards and search firms seeking board members with the financial expertise to serve on their audit committees will have the ability to search for candidates online. To download a candidate's resume or biography, all registrants will be required to complete a registration form. Only retained search firms and qualified corporate board members will be able to gain access to candidates.
How the Registry Works for Financial Executives
Many of FEI's senior finance executive members have responsibilities that require them to be regular participants in their corporate audit committee meetings. Also, as senior corporate officers, they have the finance and accounting experience, the financial sophistication and the financial oversight responsibilities that directorship demands.
FEI members who are interested and willing to be considered for available board seats can go to the Web site and complete the required documentation, in addition to uploading their resume or biography. For further information, contact Susan Cully, manager, Career Services at firstname.lastname@example.org or 973.765.1043.
RALPH D. WARD is editor of the Board-room Insider online newsletter (www.boardroominsider.com) and author of The New Boardroom Leaders, by Green-wood/Prager.
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|Title Annotation:||READ FOR CPE CREDIT|
|Author:||Ward, Ralph D.|
|Date:||Mar 1, 2009|
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