In the beginning of the year, Protiviti published our annual audit committee agenda recommendations for 2019, summarized in an earlier post by Protiviti Managing Director (and blog host) Jim DeLoach. Since there is always a lot to unpack in these recommendations, we also hosted a recent webinar for audit committee members and others, available on demand on our website.
As my colleagues point out in the webinar, there is an ever-growing variety of issues of which audit committees need to stay abreast these says. At its core, however, the function of the committee remains the same: to ensure the integrity of a company’s financial statements. In this post, I wanted to dive down into some of the more pressing financial reporting issues that should be on an audit committee’s radar as we move through this year.
The overarching financial reporting challenge that public companies have been dealing with over the past couple of years is adapting to changed accounting rules – revenue recognition, lease accounting, current expected credit losses (CECL) and insurance contracts – and efforts by the Public Company Audit Oversight Board (PCAOB) to ensure that external auditors are being diligent in verifying compliance. This has been an ongoing process, with attention shifting from one new standard to the next as deadlines approach and pass.
From a financial reporting oversight perspective, the audit committee has a broad mandate to ensure that management is presenting the financial position and results of the company fairly. The committee’s job is to make sure management presents results of operations and cash flows in accordance with the changing rules and consistent with the guidance provided by external auditors and findings and recommendations by internal auditors.
To that end, it is instructive to look back at the implementation of revenue recognition, assess how things are going with adoption of the new lease accounting standard, and look forward toward preparations for engagement with external auditors on the identification of “critical audit matters” (CAMs).
With revenue recognition changes now in the rearview mirror, audit committees should be reviewing the change management process to determine what went right and wrong, how the market reacted to the new disclosures, what questions came up on earnings calls, and what external auditors had to say about it. Although not every company had to make significant changes, those that did should be able to apply many of the same change management practices in implementing new lease accounting rules, which must be reflected in 2019 statements.
Without getting bogged down in the minutia of lease accounting, audit committee members need to be able to apply the lessons learned from the revenue recognition implementation. It’s a matter of understanding how the change process works, and asking the right questions to ensure that management is prepared for the scope, budget, and timing of the project. Consider the human resource impacts – has the company allocated the right amount of resources, with the right skills for the job of implementing change, while also ensuring that the finance function tends to its day job? With so much change occurring over an extended period, audit committees should also be on the lookout for “audit fatigue” within the internal audit function.
Critical Audit Matters
Finally, now that external auditors are required to identify, and companies are required to disclose, 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 – to ensure that CAMs, once identified and disclosed, are given due scrutiny in the preparation and auditing of financial reports.
The pace of change is accelerating. Audit committees should have a good framework for understanding what the CAMs are and how they should be evaluated. There needs to be a process for assessing and responding to risks where a material misstatement could occur and implementing controls to mitigate those risks.
Given the pace of change in financial reporting matters, audit committees certainly have their hands full. But financial reporting isn’t the only issue with which they should be concerned. To hear the take of my colleagues David Brand and Brian Christensen on matters related to processes, technology and next-generation audit transformation, log in to the free webinar.