By Amy O’Connor
Vice President Stakeholder Engagement and Communications, Center for Audit Quality
I had the pleasure of speaking at the Audit Committee Forum as part of the National Association of Corporate Directors (NACD) Global Board Leaders’ Summit. Investors expect more than just oversight; they expect audit committees to be proactive stewards of governance, transparency, and emerging risks. There is opportunity for auditors to level up their language around how they view the work of the auditors from simple audit quality to being guardians of trust in capitalism. Below are some of my key takeaways from the discussion.
Audit committees are no longer tasked solely with ensuring accurate financial reporting. Today, they are seen as key players in a larger ecosystem of corporate governance, encompassing everything from internal controls to regulatory compliance and risk oversight. Investors, while supportive of audit committees, view their work primarily as a tool for decision-making, valuing their independence and objectivity. They rely on audit committees to uphold the quality of financial reporting, considering this to be a pillar of trust in the U.S. financial system, strengthened by Sarbanes-Oxley (SOX) and the Public Company Accounting Oversight Board (PCAOB).
However, despite the positive perception, there’s a sense that audit committees are often invisible until something goes wrong, such as an audit failure. This suggests that while investors generally trust the system, there is a disconnect between their perception of audit quality and the actual role audit committees play in maintaining it.
One of the most significant investor expectations revolves around the composition of the audit committee. Investors want more disclosure regarding the qualifications and experience of audit committee members, particularly as the committee’s responsibilities continue to grow. Traditionally, audit committees have focused on financial reporting and internal controls, but with the expansion of their duties into areas like cybersecurity, ESG (Environmental, Social, and Governance), and emerging technologies such as AI, the skillsets required are evolving.
Investors are increasingly asking whether audit committee members should have a CFO or Chief Financial Expert (CFE)-level understanding of accounting and finance. They also question the value of adding first-time directors to audit committees, which could offer fresh perspectives and opportunities for mentorship but may also require balancing against the need for seasoned expertise.
Audit committees are frequently described as the “kitchen sink” of board responsibilities due to the breadth of emerging risks they oversee. This expansion can sometimes result in suboptimal oversight, as committees risk being overburdened and falling into a “check-the-box” mentality. To avoid this, investors suggest that boards must continually assess the skills within the audit committee and ensure the right balance of experience and specialization.
While reducing the scope of audit committee responsibilities is not necessarily the answer, proper risk assessment and purposeful skill-building are essential. This will allow audit committees to manage their expanding duties effectively without compromising on quality.
One area where investors are seeking improvement is transparency around audit committee activities and external audits. Investors are increasingly calling for less templated, more meaningful communication from both the audit committee and the external auditor. They want to know what the audit committee is doing, how they are doing it, and why it matters. Specific disclosures, such as the length of an audit firm’s tenure or the committee’s involvement in selecting the audit partner, are seen as valuable but are often missing from current reporting.
There is also growing interest in understanding how audit fees relate to audit quality. This type of detailed information helps investors make more informed decisions and fosters greater confidence in the financial reporting process.
As the business landscape continues to evolve, so too do the risks that audit committees must oversee. Climate-related disclosures, cybersecurity, and the rise of artificial intelligence (AI) are all areas that are quickly becoming part of the audit committee’s purview. Investors are particularly interested in how audit committees are preparing for these challenges and ensuring that the appropriate governance structures are in place.
In particular, AI presents both opportunities and risks for companies, and audit committees must be vigilant in understanding its impact on financial reporting, fraud risk, and governance. As companies increasingly integrate AI into their operations, audit committees will need to ensure that robust controls are in place to mitigate any associated risks.
The feedback from investors is clear: while they are generally satisfied with the current state of audit committees, there is always room for improvement. Maintaining the quality of corporate reporting is an ongoing journey, one that requires audit committees to stay ahead of emerging risks, continually assess their composition and skills, and communicate more transparently with stakeholders. By doing so, they will not only meet investor expectations but also play a critical role in safeguarding the financial health of the companies they serve.
© Athena Alliance 2024
