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What Is the ‘Cost’ of Audit Committees?

Ron Ries, CPA, CGMA

I read with some concern the article by Arthur J. Radin, “Are Audit Committees Worth the Cost?” published in the August 2018 CPA Journal (http://bit.ly/2pkOuCA). How does Radin define cost in this article? Is it the cost of board members and committee members' time, or the time incurred by auditors to attend these meetings?

The current board committee structure may not be perfect, but its current imperfection and lack of a more viable benefit is not a reason to abolish it, but rather to improve upon it. The issue warrants proactive steps to deal with its effects rather than ignore it by deregulating the process. I do suspect that the committee structure as currently exists may be failing due to a lack of constructive effort, perhaps including management, governance, and a politically motivated lack of effort to avoid more diligence.

Yes, the audit committee is not an independent group per se, but it is designed to provide a level of fiscal and related management competence to review the efforts of both the outside auditors and management that culminate in the year-end audit report. In addition, the committee has access to the independent auditors throughout the year to discuss issues evolving in the entity's specific sector, whether external trends within the economy or specific changes in accounting regulations affecting that organization and industry. This is far preferable to merely having the auditors present their year-end report to the entire board. A full board can take comfort in a proper audit committee review and analysis. It is a smaller, more expert group better prepared for the issues at hand.

The intent of the audit committee and even the audit process is not merely to detect fraud, but to ensure that the organization is applying appropriate accounting principles and standards in the conduct of its fiscal management practices. These might vary by industry and might reflect observations of improprieties at other organizations. This may sound oxymoronic, but real fraud often lies more deeply embedded in certain practices well beyond or beneath the scope of an audit. Then why have an audit at all? Because it provides more security on a regular basis than just the after-the-fact discovery of fraud.

My efforts as CFO, outside auditor, and audit committee chair at various points in my professional career have included much dialogue about the company and industry being reported on, existing and prospective industry accounting pronouncements, and suspected internal practices deemed insufficient in generating overall comfort to all parties. These discussions, additional procedures if necessary, and even discussion about fiscal and other management personnel that may warrant further action, generally do not get disclosed beyond these efforts. They usually represent an intensive collaboration between auditors, management, and the audit committee that need not be brought before the entire board.

In addition, there are circumstances where the organization, with the consent of the auditors, may wish to modify disclosure on significant issues to enhance the reporting process. A proactive approach like this is intended to raise the bar on reporting as part of a public relations effort. Doing this in conjunction with the auditors and, as I have seen, the audit committee can add significant insight into these discussions. In addition, auditors prepare management letters as part of the audit process, which highlight significant weaknesses or deficiencies that warrant further action in the future, but which generally do not compromise the existing financial statements being audited. Here, too, the audit committee can add significant insight into the relevance of the comments, in dialogue with the auditors and management, but without compromising the audit results.

Although the audit committee does report to the board, it has a distinct fiduciary responsibility as a standing committee. In addition, in my experience, when a company has an internal audit function, that department generally reports its findings to the audit committee. At the beginning of the year, the CFO, internal audit department, and audit committee meet to discuss areas of focus, whether it involves recurring areas of interest, potential exposure, or concerns about risk.

As audit committee chair, I have access to the auditors all year; I ask about industry issues, things they find other similar organizations are thinking about within the industry, and accounting issues that have significant impact. In addition, as audit committee chair, I am the contact person under the organization's whistleblower policy, maintaining independence from management.

As an auditor, I felt more comfortable knowing there was a separate committee to work with, sometimes with, and sometimes without, from management input. Smart auditors should take advantage of the ability to meet the audit committee without management. Although they have a mutual but separate allegiance to both management and the board, it is in their best overall interest to speak openly about their findings about management to the audit committee.

As a CFO and part of senior management, I took advantage of my relationship with a distinct group of knowledgeable board members—individuals who were my allies but also challenged me on critical issues and on certain decisions. It's a team effort.

In conclusion, when performed properly, an audit committee adds to better management and governance. If displayed internally and externally in its best light, audit committees can help a company achieve greater respect and improve its reputation.

Ron Ries, CPA, CGMA. New York, N.Y.

 
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