Proposals are afoot to increase the responsibilities of audit committees
By Michelle Perry | Published 15:58, 02 September 11
The news this week that the Financial Reporting Council plans to investigate how companies report strategic risks is good news for all stakeholders.
However suggestions that audit committees will have to disclose whether they came across any inaccurate or inconsistent information in a company’s annual report and not solely its financial statements as is currently the case is worrying.
Non-executive directors that I have spoken to in recent months and especially chairmen of audit committees broadly welcome proposals (from the FRC and EC) that allow them to disclose more without infringing on commercial sensitivities. But they’ve all voiced concerns about adding to their responsibilities.
They have some support in the Institute of Internal Auditors. Jackie Cain, IIA policy director, said that more work will need to be done to ensure that audit committees are equipped to take on the additional responsibility for risk reporting being recommended by the FRC.
Cain says: “Our most recent research suggests that some audit committees’ handle on the risks facing their company is not as firm as it should be. Clearly, if they are to take on additional responsibilities for risk reporting, they will need additional support as well as clear guidelines.”
The FRC anticipated these concerns. The regulator highlighted current fears about a shift in responsibilities for audit committees in its report: Boards and Risk – A summary of discussions with companies, investors and advisers.
“The main argument put forward by those participants who favoured separate committees to address key risks was that audit committees were already heavily loaded and did not have the time to address risk properly, and that a different set of skills may be needed,” the report said.
In its report the governance watchdog attempts to pre-empt concerns with suggestions of how to overcome potential stumbling blocks such as separating audit and risk committees, holding joint meetings or inviting other board members to participate in audit committee meetings. But it’s not so much the logistics that should be the main concern.
What if non execs overlook a particular risk that is later exposed? Not only could it damage the share price but it could also mean the company falls foul of governance rules? Won’t shareholders and other stakeholders want to hold the non execs as well as the board responsible for such a glaring oversight?
If audit committees are to take on increased responsibility won’t the time they dedicate to the job increase significantly and therefore shouldn’t their pay rise to reflect the increased responsibilities?
And if these proposals become part of governance will non execs remain non-executive at all? Will we have to come up with a totally new term for those that are the anchor to the executive board?