By Richard Chambers | March 28, 2016
In the 21st century, corporate audit committees have become the sentries charged with guarding corporate financial integrity on behalf of weary shareholders. Their significance is not lost on legislators, regulators, and equity listing exchanges, who have charged them with the important task of safeguarding against the financial shenanigans that have severely shaken confidence in equity markets over the past generation. Like any platoon of sentries, audit committees need strong and capable leaders who inspire confidence and do not shrink from the critical tasks at hand.
As internal auditors, our responsibilities are carried out under the watchful eyes of our audit committees. Conversely, the working relationship also affords us the opportunity to observe and assess the effectiveness of the audit committee and its chairman in representing the interest of shareholders. For example, we are keenly aware of how effective the chairman is in supporting internal audit’s independence and its actions to bring value to the corporation. As chief audit executives (CAEs) build and execute risk-based audit plans, a strong audit committee chair can serve as a guide, sounding board, advocate, referee, and protector.
From my experience, the best audit committee chairs possess certain attributes that not only position them as outstanding sentry leaders, but also as strong and passionate supporters of the internal audit function. Drawing on my own experience, and in conversation and consultation with several iconic audit committee chairs, I’ve crafted a list of five attributes that extraordinary audit committee chairs share.
Courageously Independent — A fundamental attribute of the best audit committee chairs is independence. Yet, these positions often are filled by individuals based on tacit approval by management. An audit committee chair might naturally assume management’s comments and actions are always accurate or in the best interest of the organization. We have had too many recent examples that belie that assumption. Sometimes management will present the audit committee with information that is incomplete or, worse yet, misleading. I know of one CAE who, after challenging the CEO’s personal expenses being paid by the corporation, was told by the audit committee chair they didn’t “understand executive perks.”
It is essential for all audit committees to maintain their independence if they are to effectively protect the interest of shareholders and investors. Independence is critical for the audit committee chair who often influences the agenda and temperament of the audit committee. Extraordinary audit committee chairs display the courage to challenge management, the external auditors, and internal auditors when warranted. By courageously exercising their independence, these men and women inspire the rest of the audit committee to do the same.
Professionally Skeptical and Intellectually Curious — The ability and inclination to ask questions, understand and interpret information, and encourage discussion on contrary points of view support healthy and thorough debate on risks, good governance, business strategy, and more.
However, it is important to make a distinction between just being skeptical and professional or informed skepticism. Arbitrary questioning of all claims or positions is counterproductive and will be viewed as obstructive or cynical. The best audit committee chairs bring deep expertise to their role and take the time to become informed about the company to be better able to ask insightful questions that reflect a knowledge of the industry. This prepares them to offer informed and credible challenges when the need arises. And they demonstrate that no question, if it is an informed question, is inappropriate.
Extraordinary audit committee chairs often challenge what they are told if validity is in question. They are able to tactfully press for more detail and challenge assumptions to explore an issue beyond the superficial.
Deeply Experienced — A prerequisite for credible professional skepticism, this attribute reflects the chairman’s financial, business, and industry expertise. It is important for the chairman to have a strong familiarity with financial management. He or she should be sufficiently familiar with technical accounting and auditing requirements to be able to review company filings, and ask appropriate questions about matters in those filings as they arise. However, too often, it is assumed that financial expertise is all that is needed. Retired external audit partners are parachuted onto audit committees and rapidly ascend to the role of chairman. No one questions their financial expertise, but in many instances, their entire careers were spent in public accounting firms with a vastly different business models from the companies on whose audit committees they sit. While many of them grow into effective audit committee chairs, far too many view their role through a narrow lens.
Understanding significant risks requires more than knowledge of accounting. Expertise in governance, culture, and management behavior is critical. With this broader expertise it becomes less likely that an audit committee will discourage internal audit from considering nonfinancial risks that may threaten the company from a strategic or operational perspective.
Beyond just knowledge of the business gained from the sidelines, extraordinary chairmen often bring deep experience in the industry or in executive leadership roles of other organizations or companies. As a highly respected audit committee chair recently told me, “An audit committee chairman wins credibility and respect if he or she has a few battle scars.”
Approachable Relationship Builders — A key to successful relationship building is to understand that it is a two-way street. Extraordinary audit committee chairs tirelessly engage with other audit committee members and are proactive in their outreach to management, the external auditors, and the internal auditors. This is typically borne from a genuine desire to engage.
Integral to this is the role the chair plays in building teamwork skills that allow all audit committee members to contribute as they should rather than merely being recipients of filtered information. Strong relationships built by the chair allow all committee members to be engaged, which leads to more efficient and effective audit committee meetings.
These “meeting management” skills are demonstrated through the flawless planning, organizing, and controlling of audit committee gatherings. A strong audit committee chair also ensures that information to be discussed at meetings is made available in a timely manner and in a digestible format. After all, information is the lifeblood of audit committee meetings.
What’s more, full engagement goes beyond the audit committee. As one audit committee chair told me, “Ideally, outreach should include a monthly call with the CAE, a quarterly call with external auditors, and periodic calls with the chief financial officer (CFO) or other C-suite executives.”
Risk-centric Strategists — This final attribute pulls together other key skills to allow for a more robust, informed, and holistic view of the organization and its risks. Often, internal auditors are criticized for not “connecting the dots” for audit committees that put risks, strengths, and weaknesses in perspective. The best audit committee chairs understand when the dots need to be connected, and what the resulting picture reveals. They not only understand the need for the CAE to follow the risks, but they actually nudge them there when warranted.
Extraordinary audit committee chairmen are not content to be served by average external audit partners, CFOs, or CAEs. They are passionate that their companies deserve the best executives in these roles, and they will not rest until changes are made when their audit committees believe they are warranted. They also coach, mentor, and evaluate other audit committee members in their ongoing roles. They draw on the courage referenced earlier to collaborate with their chairmen of the board and others if a change is warranted in audit committee composition.
Extraordinary audit committee chairs have a keen sense for their role. They understand its strategic significance, and they invest ample time and energy to be the best they can be. This strategic approach includes an implicit commitment to continually growing in the position and seeking additional experience, knowledge, and skills. Today’s dynamic and volatile business environment demands business leaders continually reinvent themselves to be effective in their roles as board members and audit committee chairs.
As always, I encourage you to share your thoughts.