Communications, Relationships Key to Audit Committee Success

As the audit committee’s purview expands, effective communications and strong relationships are keys to organizational risk management and oversight.

Panelists at the Financial Executives International annual Current Financial Reporting Issues Conference (CFRI) said controllers can play an important role in streamlining the audit committee’s efforts by providing important information in a concise manner.

“We’re all inundated with too much today, I don’t care where you’re sitting,” said Barbara Hackman Franklin, president and CEO of Barbara Franklin Enterprises, a board member of Aetna, Inc., and a former chair of six public company audit committees.

“The audit committee’s workload keeps going up, and I don’t see that changing. The question is how you manage the time you have, what you put on the agenda, and how you structure the committee’s agenda to do the most important things.”

Nick Cyprus, audit committee chair for DigitalGlobe and Volt Information Sciences, said he prefers to review information in slide decks with page references to the appropriate filings. Typical topics include financial statements, along with commentary about key, new and deleted disclosures, and information about important decisions and policy changes.

But more important than the written communication, he said, are conversations with company management about ongoing or evolving issues.

“I talk with the chief accounting officer or head of internal audit on a monthly basis,” Cyprus said. “I don’t want to wait for a quarterly basis. We’ll talk about what’s changed, and what’s going on. If something comes to my attention that I think is significant, I’ll put it on the agenda of the next committee meeting. Or, if it’s really important, we can pick up the phone and have an audit committee call.”

Leslie Seidman, former FASB chair, a director at Moody's Corp., and executive director of the Center for Excellence in Financial Reporting at Pace University, said she would advise controllers to update committee members on issues that were discussed at the previous meetings, new issues that have emerged or may be expected, and the resolution of important matters highlighted at previous meetings.

“What I don’t want to see is, every quarter, the same critical accounting estimates,” Seidman said. “I want to see issues, past or brewing, and we can decide whether they’re critical because we might have different points of view about the level of judgment that’s required.”

Franklin added the board’s agenda should be structured to review regular risks on an ongoing basis, with emerging issues being brought forward appropriately.

Along with the committee’s scheduled meetings, the panelists said members should feel comfortable reaching out to key members of management informally.

“Relationships count, and from the standpoint of the chair, you need relationships with the Controller, the CFO, the CEO, and the internal auditor,” Franklin said. “The communication needs to flow, and it needs to flow between meetings, not just during meetings or if there’s a crisis. You need to build relationships, and an alert chairman needs to know what’s being said by the controller, and not being said, and where questions need to be asked.”