Boards today – especially audit committees – are expected to develop and maintain a thorough understanding of business risks and ask the tough questions to ensure that critical risks are being addressed and that the company is delivering on its regulatory and fiduciary reporting responsibilities.
With so much to consider, it can be difficult to know where to start. To that end, Protiviti annually identifies several agenda items for audit committees to consider in the year ahead. In compiling our 2019 agenda we considered input from our interactions with client audit committees, roundtables we conducted with directors, and responses to our annual Top Risks survey, as well as informal feedback from directors we encountered throughout the prior year in various venues.
The suggested 2019 agenda consists of eight issues – four pertaining to enterprise, process and technology risks, and four to financial reporting risks.
Enterprise, Process and Technology Risk Issues
In its simplest sense, the primary job of the audit committee of a public company is to ensure reliable and fairly presented financial reports to investors. There are many activities in which the committee must engage in order to fulfill its primary task. To that end, in 2019, we recommend that audit committees give extra attention to the following four operational concerns:
- Risks that could affect the business and its reporting. There are many estimates required in preparing financial statements. The continued validity of those estimates depends on a number of factors, including business conditions, regulations, the financial health of customers and the competitive landscape. Audit committees need to understand these risks and how they potentially can affect the financial statements so they can engage in a robust dialogue with management and the external auditor.
- Finance department’s ability to deliver on expectations in the face of change. With so many aspects of the business changing simultaneously and with greater frequency – from new technologies to new accounting standards – audit committees need to ensure that finance teams are able to scale up and down quickly and that they have the right people and processes in place to not only meet growing demands, but also add value with improved analytics, reporting and collaboration with business units.
- Environmental, social and governance (ESG) and integrated reporting developments. As investors demand more information on nonfinancial performance, there is a trend toward a more integrated, standardized form of financial and nonfinancial reporting. This is an important trend, with influence from institutional investors, regulators and voluntary disclosures by companies, and one that audit committees should be giving serious consideration in 2019 and beyond.
- Best and highest use for internal audit. Sometimes the very characteristics that can make a good internal auditor – perseverance and attention to detail – can interfere with an auditor’s ability to embrace and adapt to change. As audit committees look increasingly to the internal audit function for broader, strategic insights and analytics, our research suggests that many audit functions are behind the maturity curve when it comes to integrating digital tools and technologies into the audit process. Audit committees need to assess the resiliency of the internal audit function and make their expectations clear.
Financial Reporting Issues
Financial reporting integrity will always be the core concern of an audit committee. What that entails, however, varies from year to year. Top concerns for 2019 include:
- Implementation of new accounting standards. Close attention should be paid to the implementation of revenue recognition and lease accounting standards, with special emphasis on making sure that management brings in the required skill sets and subject-matter expertise.
- Critical audit matters. Now that companies are required to disclose any material financial issues in audit reports involving complex or subjective auditor judgment, audit committees should be meeting with management to evaluate process improvements to address those concerns.
- Issues raised by the PCAOB and the U.S. Securities and Exchange Commission (SEC). With PCAOB inspection reports on large firms pending, audit committees should remain vigilant in following up on deficiencies flagged in previous inspections, and be on the lookout for movement by the SEC on matters affecting financial and public reporting.
- Other financial reporting areas of significance. In addition to the issues discussed above, the audit committee should make sure that any lessons learned in the preparation of 2018 audited financial statements are addressed in 2019. Financial institutions, for example, should be evaluating the potential effects of a new standard for measuring credit losses, which is scheduled to become effective in 2020.
These are just the highlights of the issues facing audit committees this year. You can read our complete 2019 Audit Committee Agenda in the latest edition of the Bulletin.