A survey entitled “Audit Committee Practices Report: Common Threads Across Audit Committees” was recently published by Deloitte and the Center for Audit Quality, an affiliate of the American Institute of Certified Public Accountants. The survey analyzed 246 responses, including 86% of respondents who served on audit committees of public companies.
One of the survey’s key findings was that many audit committees suffer from a lack of functional diversity. Here are the details.
Role of the audit committee
Audit committees act as gatekeepers over financial reporting. This means overseeing the accounting and financial reporting process.
In addition, the audit committee pays close attention to how a company manages risk and ensures compliance with relevant laws and regulations. The committee also evaluates whether the company’s control environment — including its internal and external audit processes — is effective.
Oversight of external auditors
A key task for audit committees is evaluating whether external auditors conduct their work in accordance with the relevant auditing standards. When evaluating auditors, the audit committee should also consider such matters as:
- The auditor’s knowledge of the company’s business and industry,
- The extent of involvement of senior team members in the audit
- The use of other auditors and specialist expertise,
- The capability accessible by the auditor in different geographic locations,
- Coverage of internal systems and controls, and
- How the engagement partner and team are accountable within their firm for audit quality.
Furthermore, audit committees routinely communicate with auditors about risks, issues and other matters so they can help each other in performing their respective roles. During the pandemic and the ensuing economic uncertainty, many audit committee chairs reported having more-frequent communications with external auditors.
Areas of expertise or experience
In terms of the composition of audit committees, survey respondents had the following expertise or experience:
- 99% finance or accounting,
- 77% operations,
- 72% enterprise risk,
- 66% compliance,
- 54% technology,
- 40% human capital,
- 35% cybersecurity, and
- 26% environmental, social and governance (ESG).
Note: Some respondents had expertise or experience in more than one category.
The International Organization of Securities Commissions (IOSCO) provides guidance on best practices for audit committees. IOSCO suggests that at least one member of the audit committee, preferably the chair, should have a good knowledge of financial reporting and auditing. But many organizations have complex operations and face numerous risks, so audit committee members need to have skills beyond just financial literacy.
Where are the gaps?
Survey respondents said that the following additional expertise would enhance their audit committee’s effectiveness:
- 41% cybersecurity,
- 31% technology,
- 20% ESG,
- 14% enterprise risk,
- 9% operations,
- 8% compliance,
- 7% human capital, and
- 5% finance or accounting
Benefits of diversity
For companies of all sizes and industry groups, diversity is a hot topic today. In addition to increased gender, racial and ethnic diversity, audit committees should include members with diversity in professional skills and experience.
Getting input on major decisions from people with a wide variety of backgrounds and experience levels helps enhance the audit committee’s ability to monitor financial reporting. Diversity of thought diminishes the grip of group thinking. Committees with diverse members help enhance financial reporting quality and are more likely to detect anomalies and omissions.
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