As public companies and their boards prepare for the 2016 proxy season and annual meetings, it is critical that each committee be prepared to answer difficult questions from fellow board members, investors and shareholders regarding the company’s goals and priorities for the year and the role each committee will play in helping the company meet those goals. The Ernst & Young (EY) Center for Board Matters recently published a report discussing five key areas of focus for Audit Committees. The EY report also provides 25 questions across each of these focal areas for Audit Committees and their members to consider as they plan for the upcoming fiscal year.
- Risk Management. As the primary body overseeing an organization’s risk culture and enterprise risk management (ERM) function, Audit Committees must be aware of emerging risks for public companies, know how to mitigate those risks and help their organizations achieve a healthy risk profile. In particular, EY notes that Audit Committees should understand how their companies maintain sensitive information, including confidential customer data and other proprietary information, and how such information may be vulnerable as a result of the company’s integration of cloud computing, mobile technology and even social media. Audit Committees should also have a working knowledge of their organization’s preventative measures and response strategies should a data breach occur. EY also notes that Audit Committees are increasingly finding ways to integrate big data analytics into their audit functions in an effort to mitigate compliance and reputation risks.
- Financial Reporting. As new financial reporting standards and practices are implemented by regulatory agencies, Audit Committees are tasked with overseeing their organization’s internal implementation of and compliance with these new reporting practices and standards. The EY report notes that the Financial Accounting and Standards Board (FASB) and the International Accounting Standards Board (IASB) recently issued new standards for revenue recognition which will become effective for periods beginning after December 15, 2017. Additionally, FASB is expected to release new standards for the disclosure of leases in early 2016. Audit Committees should begin analyzing the effects of these new standards to determine how their company’s financial reporting will be affected and discuss with management how the new standards will be implemented. Further, EY notes that the SEC has recently issued comments on certain areas of financial disclosures, such as MD&A disclosure regarding trends and uncertainties, segment reporting and internal control over financial reporting. Audit committees should review recent SEC comment letters regarding these issues and proactively adjust reporting practices accordingly.
- Tax. Whether a company’s business is primarily domestic or multinational in scope, evolving tax policies and trends are changing the landscape and demanding the attention of public company boards, particularly Audit Committees. Of note for multinational companies, the Organisation for Economic Co-operation and Development (OECD) has launched an initiative to combat base erosion and profit shifting (BEPS). In short, BEPS efforts are aimed to keep companies from shifting the location of their profits to jurisdictions with the most favorable tax policies. Audit Committees should stay abreast of tax developments and regulations in the jurisdictions to which they are subject to taxation. Domestically, Audit Committees are devoting increased attention to the Affordable Care Act (ACA) due to the employer mandate and risk for tax penalties under the law. Audit Committees should engage the various departments within their organization (human resources, legal, accounting, etc.) to implement the appropriate processes and procedures to ensure compliance with the ACA.
- Regulatory Developments. The EY report notes that Audit Committees are charged with overseeing existing regulatory risks, monitoring the evolving regulatory agenda and understanding implications of new rules and regulations. Thus, Audit Committees should monitor emerging trends and best practices with regard to corporate governance and the effectiveness of the company’s regulatory disclosures. In particular, Audit Committees should focus on their organization’s strategies for implementing new rules and regulations required by Dodd-Frank and the JOBS Act (for example, the SEC Pay-Ratio Disclosure update which affect disclosures for fiscal years beginning on or after January 1, 2017) as well as proposed new disclosure rules related to payments to governments by resource extraction issuers, conflict minerals, hedging by employees and directors and “clawback” of executive incentive-based compensation.
- Audit Regulatory Updates. As EY notes, 2015 was marked by significant regulatory activity around key issues related to audit committees. Notably, the Public Company Accounting Oversight Board (PCAOB) identified the following “near-term priorities”: (1) developing audit quality measures, (2) enhancing the inspection process, (3) improving the timing and readability of inspection reports, (4) improving the communication and timing of the remediation process, (5) improving outreach to audit committees and (6) pursuing a robust standard-setting agenda. Audit Committees should remain current on current initiatives in each of these areas. Notably, the PCAOB adopted final rules for audit transparency disclosures that, if approved by the SEC, would require audit firms to name the engagement partner and provide information about other accounting firms that participated in the audit. Additionally, EY notes that investors have recently sought increased transparency regarding the relationship between the audit committee’s ownership and oversight of the relationship with the company’s external auditor.
Audit Committees and their members are encouraged to read the EY report in its entirety using the link below and use the accompanying 25 questions as they prepare for the 2016 fiscal year.
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