Audit Committee on Stove

Is audit committee adding any value or is just for statutory compliance? asked the furious chairman, who had been advised recently about the abnormal functioning of some of the non-financial performance measures. He said I know you all are really independent but, are you performing your oversight function as expected? Although the firm has been certified by the external auditors for effectiveness of its financial accounting controls during the past years, these controls have inherent limitations when looked at in silos. It is high time for the audit committee to look at non-financial performance measures as well.

He further said that the stakeholder expectations are very high nowadays. Not just the financial accounting controls but the entire gamut of management accounting controls needs to be looked at. Those who design and implement controls can also override or bypass these controls. The audit committee members began to wonder how they could have met the expectations better. Audit Committee members while justifying for their current way of functioning emphasized on having, a written code of conduct and its communication at all the levels of management to prevent overriding and bypassing of controls and a hotline programme. Though the chairman considered the importance of these steps, he wanted the audit committee to become more smart and business like. He wanted the audit committee to add value.

The board room conflict was in the open. Surely the members of the board and committee had failed to understand each other's expectations. Another problem was that expectations were not shared and reviewed periodically. The expectation from the audit committee had been changed over time. With their expanded responsibilities, the audit committee members were struggling to fully understand and embrace the scope of their duties, including oversight of risk management and internal controls.

To avoid surprises, the audit committees should understand the importance of defining and agreeing with the board of directors on the scope of their oversight of risk management and internal controls. This scope should be revisited on a periodic basis.

Audit committee members can meet increased expectation by demonstrating the appropriate level of skepticism, asking probing questions, having open discussions with the management and the auditors keeping business perspective in the mind. Audit committee should also target non-financial measures and various key success factors for monitoring. These key success factors for monitoring should be determined with extensive top management involvement.

The conventional financial accounting reports, both internal and external, are much like a scoreboard at a cricket game. The scoreboard tells players whether they are winning or loosing the game, but does not tell one about what is right or wrong about his batting, bowling or fielding. One must watch the ball in order to get a hit rather than just study the scoreboard. Conduct of the management cannot be monitored effectively just looking at the financials alone; one should see the non-financial performance measures too.