Guest Blog: Audit and Risk Governance -- How Does Your Board Rank?
Audit and Risk Governance - How Does Your Board Rank?
I'm writing today to share some important information about the current environment for public company boards.
Leading proxy advisory firms, including Institutional Shareholders Services Inc. (ISS), publish corporate governance ratings and detailed reports on public company governance, including evaluations of a company’s corporate governance risk profile related to audit and risk oversight. Have you ever wondered why some companies have poor ratings from ISS for their audit and risk oversight governance?
Corporate boards of directors today are challenged with their clear responsibilities to oversee the risk management of their companies, especially financially-related risk. Board nomination committees are actively seeking experienced executives who are strategic thinkers, with practical experience in management and, most importantly, those who will qualify as financial experts.
Here are some of the risk issues that might potentially impact a company’s rating as it relates to audit and risk oversight governance:
• How many financial experts serve on the audit committee? Financial experts should have experience as a CFO, CPA or partner of an accounting firm; for more effective corporate governance, at least one or two financial experts should sit on the Audit Committee.
• Non-Audit fees represent what percentage of total fees? Consider that an auditor's ability to remain independent and objective is questionable when fees paid to the auditor for non-audit services, such as management consulting and special situation audits, exceed the standard annual audit fees.
• Did the auditor issue an adverse opinion in the past year? An “adverse” auditor opinion is when the auditor believes that no part of a company’s financial statements are presented correctly, contain material misstatements, and therefore, should not be relied upon.
• Has the company restated financials for any period within the past two years? Companies may restate their financials due to misrepresentation or accounting irregularities that may result in significant reputational, legal, and financial risks. Hundreds of companies have restated their financials in recent years, calling to question the reliability of the company's numbers in the future.
• Has the company made non-timely financial disclosure filings in the past two years? Late financial filings (10Qs and 10Ks) could be indicative of ineffective internal controls.
• Has a regulator taken enforcement action against the company, director or officer in the past two years? Regulatory enforcement actions could result in significant penalties for the company and adversely impact the company’s reputation and shareholder value. For the board, it is important that directors consider the nature of the underlying investigation and the size of any monetary penalties. Settlement agreements with regulatory bodies are also considered, even if the allegations are denied underlying the investigation.
• Is the company, director or officer currently under investigation by a regulatory body? Investigations indicate the potential of significant penalties for the company that may adversely impact the company’s reputation and shareholder value.
• Has the company disclosed any material weaknesses with its internal controls in the past two fiscal years? Companies with significant material weaknesses potentially have ineffective internal controls, which may lead to inaccurate financial statements, hampering shareholders’ ability to make informed investment decisions, and may lead to a weakening in public confidence and shareholder value. The signals of these weaknesses can often be reflected in the share price in the capital markets.
The above is a brief review of the top issues that members of board directors are considering in an environment in which shareholders and a growing range of stakeholders are taking a much closer look at board room actions. Those recommendations may result in a more comprehensive, deeper focus on individual board members and their skills.
If you have any questions, or thoughts to share, I would appreciate having a conversation. Please let me know a good time and number to reach you.