Audit committees used to press veteran CFO Christine Russell on why her cash investments weren’t earning higher yields. Now, after witnessing liquidity freezes in once-safe havens like auction-rate securities, they are less concerned with making money than with hanging on to it.
Scrutinizing a routine cash-management issue is just one of the new items on top of audit committees’ agendas these days. As companies across all industries reassess their risk appetites, their audit committees are conducting similar self-evaluations — and often reordering the priorities they deem worthy of their worry.
That has resulted in broader mandates, more discretion in agenda-setting, and many more questions for company executives, particularly CFOs. Certainly audit committees still have to pay attention to compliance and other tasks related to Sarbanes-Oxley, but “the emphasis has changed to strategy, operations, and managing financial risk,” says Ed Thompson, former CFO of Amdahl who chairs four audit committees, including those at ShoreTel and InnoPath Software.
Finance executives should expect to hear from audit-committee members more frequently and answer more-probing questions. Many already do. “There’s been a shift, and audit committees have had to become more proactive,” says Ed Terino, a former finance chief who heads three audit committees, including that of Phoenix Technologies. He says he often speaks weekly with the CFOs of those companies.
Somewhat surprisingly, what’s not high on the new list is heightened concern about financial-statement fraud, which was the big hot-button issue following the last crisis. For the most part, in fact, “the number of financial-reporting failures has been relatively small given the magnitude of the latest downturn,” says Joseph Carcello, an accounting professor at the University of Tennessee.
What has risen to the top of the priority list for many audit-committee members is monitoring the safety of cash investments, thanks to lessons learned from such events as Lehman Brothers’s rapid demise, the freeze-up in the commercial-paper market, and lack of confidence in credit ratings. “Audit committees are taking more seriously the types of investments their companies are allowed to make with their cash,” says Russell, who is CFO of Evans Analytical Group, which runs a network of laboratories, and chairs the audit committee for semiconductor company QuickLogic.
Likewise, the financial crisis and its accompanying controversy surrounding banks’ “fair-value” valuations of assets such as mortgage-backed securities, plus accounting-standard-setters’ attention to the matter, have forced audit committees to ask more questions surrounding nonfinancial companies’ valuations of their securities. These estimates “involve tremendous judgment, and they’re hard to do well,” Carcello says.
Audit committees have also become a prime source of risk-management oversight, in ways that go far beyond the direct risk to financial statements. Nearly two-thirds of audit committees are now responsible for some type of risk oversight; of those, 36% now track strategic and emerging risks, double last year’s number, according to a recent survey of executives by the American Institute of Certified Public Accountants and North Carolina State University.