Seven Tips for Improving the Operation and Outcomes of Audit Committees

Having attended a large number of audit committee meetings over the years I have seen a wide variety of practices ranging from the good to the not so good. Audit committees can add significant value and play a key role in improving the governance, risk management and internal control frameworks within an organisation. However, the ability of the committee to successfully achieve these outcomes is often constrained by its structure and operation. Based on my experience, I offer the following 7 tips to help improve the functioning and output of an audit committee.

 

1. Forward Meeting Agenda/Plan 

Most audit committees have a charter which sets out the committee’s responsibilities. These generally include oversight of the risk management and internal control frameworks, internal and external audit and perhaps oversight of legislative compliance and fraud and corruption prevention amongst other things. Whilst these responsibilities are all related aspects of an organisation’s corporate governance framework, in practice most committees struggle to cover off everything on the list.

The best way to address this is to develop a forward meeting agenda or plan which lists all of the committee’s responsibilities and indicates when and how the committee will receive reports or information on each. So for example, if the committee has as one of its responsibilities oversight of the organisation’s framework for monitoring and managing legislative compliance obligations, designate a meeting during the year at which a report on the compliance framework will be tabled.

This is obviously a simple tool but one that will enable the committee, at the end of each year, to “tick off” that it has considered all of the areas it is required to and hence met its responsibilities under its charter.

2. Staff attendance at meetings

Some committee meetings always seem to be attended by a multitude of staff that easily outnumber committee members (sometimes two to one!) whilst others are only ever attended by one or two of the same staff. I would always suggest leaning towards inviting more staff than less (within reason).

The problem with only having the same one or two staff attend each meeting is twofold. Firstly, the committee only hears information from the same people all the time which can often lead to a degree of filtering (intentional or unintentional). Secondly, many staff, including senior managers, often have little idea about what the audit committee does, who is on it or what its views and expectations are.

In my view, it is good practice to have staff come along to audit committee meetings to present or respond to reports relating to their areas of the organisation. If there is an internal audit report on the agenda regarding the recruitment process, for example, then have the HR Manager come along to answer questions and gauge the response of the committee to the findings. This will help build trust and relationships between staff and committee members which will ultimately benefit all stakeholders.

3. Member rotation

A significant risk for audit committees is that they can become very stagnant if memberships stays the same for too long. Problems can also arise if all, or a majority, of the committee members leave at the same time. The ideal solution is to stagger member tenure. So if independents are appointed for three years and there are three independents, replace one each year. This will ensure that new ideas and perspectives are being brought to the committee each year without losing continuity of knowledge.

 

4. KPIs and Self Evaluation

In any endeavour it is important to identify what success looks like. Audit committees should be no different. How we do we know whether the committee is achieving its objectives and making a difference?

It is good practice for a committee to adopt some KPIs and/or success measures and report against these periodically. An annual committee member self-evaluation survey can also be a useful tool.

Of course, one of the problems here is that it can be difficult to measure the success or otherwise of an audit committee. Does it depend on the number of meetings held, the number of decisions made or audit recommendations adopted or the value/benefit of improvement opportunities endorsed by the committee? There is no clear cut answer.

In my experience it is probably better to focus on how the committee works and operates. Are all members attending regularly, can the committee tick off that it has fulfilled all of its obligations under its charter each year, are members satisfied with the way meetings are run and their ability to make a contribution. If these things can all be answered in the affirmative then there is a good chance that the committee is adding value to the organisation.

 

5. Focus on frameworks, systems and policies

A common pitfall is for audit committees to get too involved in transactional level detail. “Can we get a report about that particular matter…” or “whatever happened to that issue with…” or “why hasn’t that issue been fixed yet..” are examples of requests that are sometimes made by committee members.

Generally the role of the committee should be to form a view as to whether management has adequate systems and controls in place to manage key risks to the achievement of the organisation’s objectives. To fulfil this role effectively, the committee needs to focus on frameworks, policies, procedures and systems. “Are they in place”, “are they robust” and “are there adequate assurance mechanisms in place” are the sorts of questions that need to be asked and answered. Yes it may be appropriate for the committee to monitor KPIs, incident statistics, lessons learnt from incidents etc. but rarely will a committee add value by focussing on the nitty gritty of what has happened or may happen.

 

6. Committee Member induction

Most independent members of audit committees are appointed because they have some experience in one or more areas of concern to the committee. Many have served on boards and audit committees previously. One would hope that board members (or councillors in the case of local government) nominated to the committee would also have appropriate knowledge and experience but in practice this is not always the case.

In my experience the level of induction provided to audit committee members is often very basic or in some cases non-existent. In practice, most committee members receive a copy of the committee charter and a quick briefing from the Governance Manager or the like and away they go.

Some of the problems that audit committees encounter, especially in the infancy of the committee, could be overcome by providing new members with a more thorough induction. This could be done in-house or by an external provider or a combination of both. A good induction should cover off the roles and responsibilities of the committee and its members, meeting procedures, tips for success, pitfalls to avoid, personal liability and obligations of members. A good overview of the organisation including some site visits if appropriate is also critical.

 

7. Adequate time for members to read agendas and reports

This is obviously a basic principle of good meeting practice for any committee however I am amazed at how often it is violated at audit committee meetings. The biggest problem is usually tabling of late items or distribution of supporting or supplementary information at the meeting. Sometimes this information is complex and quite voluminous. How any committee member is able to digest and properly understand information put in front of them for the first time at the meeting is beyond me.

Given the nature of audit committees and the fact that meeting dates are usually set many months in advance there should be very few, if any, late items. With a bit of organisational discipline, there should be no supplementary information or reports tabled at the actual meeting. Everything of substance should go out with the agenda several days beforehand.

Many, if not all, of the tips in this article come down to basic principles of good meeting practice. But it is amazing how many committees fall in to bad habits or neglect these fundamental principles. Whilst all committee members and support personnel have a role to play in ensuring the optimal functioning of the committee, the key role, in my view, is that of the chairperson. If the chairperson sets the right tone and ensures that the fundamentals are adhered to the committee is much more likely to operate effectively. By always striving to improve committee processes, committees can and should function effectively and add value to the organisation.

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Mitchell Morley, B.Ec, MIIA (Aust), has over 20 years’ experience in internal audit, corporate governance, risk management, OH&S, records management, privacy management, insurance arrangements and administrative services. He can be contacted on 02 9241 1344 or mitchellm@inconsult.com.au. 

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