Adapting to Uncertainty, Focusing on Transparency
2010 Public Company Audit Committee Member Survey
KPMG LLP
and public policy environments, financial statement issues—and, interestingly, IT risk—are top concerns for audit committees
in the year ahead...
1
Key Findings
Economic uncertainty and pressures to grow (or make do with less) continue to drive a sharper focus on financial statement issues, KPIs, and stresses on financial reporting and compliance
systems...
2
As a result of the economic crisis and continuing uncertainty, audit committees have intensified their focus on all financial
communications...
4
Internal transparency and communications
—the quality, flow, and usefulness of information from management—are
front and center...
6
Audit committees continue to reassess
—and refine—their role in the oversight of risk, with an eye to narrowing their focus
to “core” areas of responsibility...
8
The CFO’s/finance team’s resources might be over extended; internal audit plans could be more focused on operational and strategic risks; and external auditors are being looked to for insights on meeting agendas, information quality, and CFO
bench strength...
12
While most audit committee members view their committee as “effective,” they continue
to cite opportunities for improvement ...
16
Three developing issues—sustainability/
corporate social responsibility, social media networks, and IFRS —may require more
immediate consideration ...
19
Survey Snapshot
As the audit committee chair of one Fortune 100 company recently observed,
“After you’ve been through a force-ten gale, you spend a lot of time checking your sails.”
The past 12 months—like the 12 months before that—have continued to put companies and their audit committees to the test.
And while the economic storm is receding, it’s clear that the months ahead—in business, governance, and financial reporting—will continue to test even the best of audit committees.
More than half of the 300-plus public company audit committee members responding to our 2010 survey do not see a return to “business as usual”—and they expect to operate in a new business environment for a number of years.
As their companies focus on growth—and the sustainability of a leaner organization—it’s little surprise that survey respondents cited risk management and financial statement issues as top concerns. The impact of public policy initiatives is also high on the agenda, as is information technology (IT) risk—which jumped to number four in the ranking of top concerns (up from number six last year).
Respondents expressed greater confidence this year in their oversight of internal controls—an indication that Sarbanes-Oxley 404 processes have largely settled-in.
It’s also evident that the economic crisis—and the volatility and uncertainty that it produced—
has sharpened the audit
committee’s focus on a number of issues they view as critical to their oversight of the financial reporting process, particularly:
• The quality and internal flow of information and communications—
“transparency”
• All financial communications, including earnings releases, analyst calls, and MD&A and other disclosures
• The audit committee’s role in risk oversight
• Ensuring the CFO and finance team have the resources they need
• The effectiveness of the audit committee—from the efficiency of its meetings to
the rigor of its onboarding and self-evaluation processes.
Several issues that are not high on the agenda this year, but may require more attention: social media networks, sustainability/
corporate social responsibility disclosures, and IFRS.
This year, we posed a number of the survey questions to CFOs, chief internal auditors, CEOs, controllers, and others in management to gain a perspective on audit committee issues from outside the boardroom.
These management views may help audit committees calibrate their own views, enhance their dialogue with management, and shape their agendas in the months ahead.
What areas of oversight will pose the greatest concerns for your audit committee in 2010?(Select three)
* (e.g., healthcare, environment, energy, financial regulation on company’s reporting, compliance, risk, and control processes)
74%
47%
31%
30%
27%
20%
17%
11%
6%
5%
5%
Risk management generally
*Impact of public policy initiatives Financial statement issues IT risk Liquidity, access to capital, and cash flow
Maintaining internal controls Legal/regulatory compliance
(including Foreign Corrupt Practices Act)
Tax risk Fraud risk Tone at the top and
ethical culture Other
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
Survey
Methodology
Key Findings
Economic uncertainty and pressures to grow (or make do with less) continue to drive a sharper focus on financial statement issues, KPIs, and stresses on financial reporting and compliance systems.
The tenuous economic recovery, the search for growth, and cost-reduced business models continue to put financial reporting and compliance systems and processes to the test. Given these pressures, audit committees are continuing to focus on:
• Fair value, asset impairments, pension obligations, and other ongoing financial statement issues affected by economic conditions.
• Earnings, cash flow, liquidity positions, and key performance indicators (KPIs)
• The impact of recession-related cost reductions—particularly on talent/training, internal controls, and fraud risk
• Alignment of strategy, risks, controls, compliance, and incentives—
particularly in light of strategic initiatives the company has undertaken in response to the new economic environment
• The company’s ability to identify emerging risks and anticipate the
“velocity” of risk events (see Risk Management, page 8).
This survey, conducted between January and March 2010, reflects the responses of 306 audit committee members serving on the board of at least one U.S. public company.
“Management Views”
reflect the responses of 158 management profes- sionals, including chief internal audit executives, CFOs, and others.
In what areas are you most concerned about the impact of recent cost reductions undertaken by your company? (Select three)
Financial Reporting and Controls
36%
26%
25%
14%
10%
6%
17%
30%
5%
Employee talent and training Internal controls Leadership pipeline Fraud risk Management of outsourcing/extended supply chain Financial reporting integrity Foreign Corrupt Practices
Act and legal regulatory /compliance Not concerned Company has not implemented significant cost reductions
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
How satisfied are you that management has timely and accurate forecast information about the company’s earnings and cash flow?
How frequently does your audit committee/board receive reports on the company’s liquidity position?
How satisfied are you that your company’s risk management process enables management and the board to identify emerging risks (around the next corner)?
How satisfied are you that your audit committee appropriately considers key performance indicators (other than GAAP) in monitoring the performance of the business?
How concerned are you that the cost reductions undertaken by your company in response to the economic crisis have not been properly targeted and strategic?
How concerned are you that the cost reductions undertaken by your company in response to the economic crisis have not been properly targeted and strategic?
28% 66%
Not satisfied 6%
Somewhat satisfied
Satisfied 66%
32%
2% Not satisfied
Satisfied Somewhat
satisfied Needs improvement
14% 30%
56%
Somewhat satisfied
Satisfied
33%
26%
37%
3% Other 1% Not at all
Quarterly Monthly At every audit
committee/
board meeting
Company has not implemented significant cost reductions
Concerned
Somewhat concerned 9%
11%
43%
37%Not concerned
Management View*
*Among management respondents, more chief audit executives were “concerned” (12%) than were CFOs (4%).
11%
3% Concerned Company has not
implemented significant cost reductions
65%
Not concerned 21%
Somewhat concerned 11%
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
As a result of the economic crisis and continuing uncertainty, audit committees have intensified their focus on all financial communications.
From earnings guidance and press releases, to the MD&A and other disclosures, to the impact of the economy on the company’s financial statements, all financial communications—and the financial reporting system/processes behind them—are getting more attention from the audit committee.
Another notable finding: Only 59 percent of respondents said their audit committee “drills down” and reviews key assumptions underlying management’s material accounting judgments and estimates “to a great extent.”
In light of the economic crisis, has your audit committee increased its scrutiny of the company’s financial communications in any of the following areas? (Select all that apply)
Does your audit committee meet (in person or telephonically) to review the company’s quarterly earnings release prior to its actual release?
Financial Communications
No, but draft release is reviewed by audit committee chair 5% 3% No
92%
Yes Earnings press
releases
None of the above Scripts for 16%
analyst calls Earnings estimates
48%
43%
44%
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
To what extent does your audit committee “drill down” and review the key assumptions underlying management’s material accounting judgments and estimates?
How often does your audit committee receive reports on the activities of the company’s
disclosure committee (a committee recommended by the SEC, and typically comprised of company officers and senior managers), which considers the adequacy of the company’s disclosures contained in its public reports?
What are the primary methods by which you, as an audit committee member, stay apprised of highly technical accounting matters impacting the company’s financials? (Select two)
What role does your audit committee play in
connection with SEC comment letters the company receives? (Select all that apply)
1% Not at all
To a great 59%
extent To some 40%
extent 53%
At least quarterly Company does not
have a disclosure committee
21%
15%
9%
Disclosure committee does not provide reports to the audit committee
At least annually
2% At least twice a year
55%
Rely on tutorials conducted by
external auditor 70%
21%
Review technical literature
11%
Rely on tutorials 25%
conducted by management Rely on the audit committee financial expert
Other
Reviews management’s
response to each letter 79%
72%
30%
None of the 10%
above Clarifies process to resolve issues raised in the letter Receives copies of all SEC comment letters
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
How satisfied are you with the quality of the information your audit committee receives in connection with each of the following areas of oversight?
Internal transparency and communications—the quality, flow, and usefulness of information from management—are front and center.
Given the uncertain economic and political environment today, and the increasing complexity and globalization of business, audit committees are more focused than ever on ensuring good internal transparency and quality information—the “backbone” of the company’s decision making. Our survey finds audit committee members particularly concerned about:
• The timeliness and accuracy of financial forecast information.
• Whether management is focused on the “right” KPIs.
• Information quality generally—and specifically regarding the significant risks facing the business, IT risk, and tax risk.
• Monitoring the company’s ethical culture and tone at the top.
Transparency and Information Quality
Not Satisfied Somewhat Satisfied Satisfied Disclosures
Internal audit work plan Tone at the top and
ethical culture Company’s overall control environment Assumptions underlying management’s accounting judgments and estimates
Liquidity risk
Fraud risk Tax risk Significant risks facing the business IT risk Legal and regulatory
compliance
<1%
8%
3%10%
1% 13%
2%
1% 14%
13%
2%
1% 20%
2% 79%
32% 66%
1% 35%
3% 64%
6%
39% 58%
45%49%
14%
92%
87%
86%
85%
85%
84%
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
How satisfied are you that management has timely and accurate forecast information about the company’s earnings and cash flow?
Management View
How satisfied are you that your audit committee appropriately considers key performance indicators (other than GAAP) in monitoring the performance of the business?
How satisfied are you with the quality of the communications between the audit committee and the external auditor regarding each of the following areas?
Satisfied53%
Somewhat 39%
satisfied Not satisfied
8%
How satisfied are you with the level of
transparency—i.e., open and frank communications and information flow—between the CFO/finance organization and the audit committee?
88%
Satisfied 11%
1% Not satisfied Somewhat
satisfied
Not Satisfied Somewhat Satisfied Satisfied 92%
90%
88%
88%
87%
82%
Company’s disclosures Tone at the top and ethical culture
Control environment Assumptions underlying management’s accounting judgments and estimates
Key financial reporting risks Quality of information
provided to audit committee by management
Adequacy of audit committee meeting agendas Real-time updates on important developments
“Bench strength” and resources of CFO, controller, and internal auditor
78%
70%
63%
1%7%
1%9%
1% 11%
2%10%
2%11%
2% 16%
1% 21%
3% 27%
4% 33%
Somewhat 38%
satisfied Satisfied52%
Not satisfied
10%
How satisfied are you that management has timely and accurate forecast information about the company’s earnings and cash flow?
How satisfied are you that your audit committee appropriately considers key performance indicators (other than GAAP) in monitoring the performance of the business?
28% 66%
Not satisfied 6%
Somewhat satisfied
Satisfied 66%
32%
2% Not satisfied
Satisfied Somewhat
satisfied
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
Audit committees continue to reassess—and refine
—their role in the oversight of risk, with an eye to narrowing their focus to “core” areas of responsibility.
Given the tremendous focus on risk management and risk oversight by companies, boards, investors, and regulators, many audit
committees are rethinking their role in the oversight of risk: Should their role be limited to financial reporting risk only? Or should it be more expansive, involving other substantive areas of risk—or, perhaps, oversight of the company’s risk management processes?
Our survey indicates that responsibility for oversight of “strategic risks” appears to be shifting to the full board, while the risk oversight responsibilities of audit committees still vary widely.
Survey respondents cited “understanding the velocity of risk events”
as the top risk-management challenge facing their company.
What aspect of risk management is posing the greatest challenge for your company?
Management View
Identification of risks
13%
Tracking and reporting on risks
9%
Understanding the velocity of risk events, and preparing for/
responding to the impact.
30%
20%
Understanding the link between strategy and risk 14%
14%
Assessing risks Mitigation
of risks
What aspect of risk management is posing the greatest challenge for your company?
Identification of risks
8%
Tracking and reporting on risks
17%
Understanding the velocity of risk events, and preparing for/
responding to the impact.
30%
19%
Understanding the link between strategy and risk 14%
12%
Assessing risks Mitigation of
risks
Risk Management
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
21593NSS
Has your board formed a risk committee?
10%
12% Yes
78% No No, but board is
considering the formation of a risk committee
What role does your board/audit committee play in the development of the company’s risk appetite?
What is the status of your company’s risk management system/program?
Risk
management system implemented, but requires substantial work
Robust, mature risk management system in place
Risk management system in planning/
development stage
Other
No active/formal effort to implement risk management system
38%
29%
22%
7%
4%
13%
8%
36%
43%
Approves the company’s risk appetite generally, but not a formal statement of risk appetite Discusses the
company’s risk appetite at least annually
Approves a formal, written statement of the company’s risk appetite
Does not discuss the company’s risk appetite
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
Over the past two years, has the full board (or other board committees) assumed greater responsibility for oversight of risk, thereby narrowing the audit committee’s risk oversight responsibilities?
56%
Yes 44%
No
How frequently does internal audit provide the audit committee with assessments of the company’s risk management processes?
25%
Annually 15%
10%
40%Quarterly 10% Other
Internal audit does not provide such assessments
Twice a year
In addition to financial reporting risks, for what categories of risk does your audit committee have primary oversight responsibility? (Select all that apply)
27%
Satisfied
29%
9% 35%
Somewhat satisfied Company does not
conduct business in emerging-market countries
Needs improvement
How satisfied are you that your company has an effective process to manage the risks (including Foreign Corrupt Practices Act risks) associated with doing business—e.g., sourcing, outsourcing, manufacturing,
or sales/distribution channels—in Brazil, Russia, India, China, or other emerging-market countries?
Who has primary responsibility for the oversight of the company’s strategic risks—those risks that threaten the company’s strategy, business model, or existence?
80%
Full Board 13%
Audit Committee
Risk 3%
Committee Other4%
80%
Legal/ regulatory
compliance risks 70%
IT, security, and 66%
privacy risks
22%
16%
HR/labor risks Operational risks
6%
Strategic risks Financial risks (e.g., cash
flow, access to capital, debt covenants)
11%
None of the above
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
How satisfied are you that your company’s risk management process enables management and the board to identify emerging risks (around the next corner)?
Needs improvement
30%
14%
56%Somewhat satisfied
Satisfied
Has management at your company formed a
management risk committee and/or appointed a chief risk officer (or equivalent) to support the company’s risk management program? (Select all that apply)*
In what areas is your audit committee involved in helping to address the risks associated with the company’s compensation plans? (Select all that apply)
42%
36%
Reviewing compensation disclosures
32%
27%
24%
None of the above Ensuring compensation
arrangements do not encourage “excessive” risk Defining appropriate and accurate metrics to measure performance Determining quality of data used to assess performance
49%
26%
Yes, the company has formed a management risk committee Yes, the company has appointed a chief risk officer (or equivalent)
36%
No
*12% said the company has both formed a management risk committee and appointed a chief risk officer (or equivalent).
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
The CFO’s/finance team’s resources might be over extended; internal audit plans could be more focused on operational and strategic risks; and external auditors are being looked to for insights on meeting agendas, information quality, and CFO bench strength.
The pressures on the CFO and finance team and the adequacy of their resources—including budget, people, and skills—are clearly areas of concern for audit committees. And many survey respondents say the committee has not established clear performance objectives for evaluating the CFO, or a formal CFO succession plan.
Management View*
How confident are you that your audit committee knows whether the CFO has the resources (people with the appropriate skill sets and budget) to carry out his or her responsibilities effectively?
Not confident
40% Somewhat confident
47% Confident 13%
How confident are you that your audit committee knows whether the CFO has the resources (people with the appropriate skill sets and budget) to carry out his or her responsibilities effectively?
3%Not confident
63%
Confident 34%
Somewhat confident
Interaction with CFO and Auditors
*Among management respondents, chief audit executives were more “confident” (53%) than CFOs (21%).
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
21593NSS
Does your audit committee’s evaluation process for the CFO include clear performance objectives against which performance is rigorously evaluated?
47%
Yes 53%
No
How concerned are you that the CFO and finance group are routinely working extraordinary hours—
potentially impacting their effectiveness and the quality of the company’s financial reporting?
Concerned 19%
37%Somewhat concerned 44% Not
concerned
Does your audit committee (or board) have a formal succession plan for the CFO?
39%
61% Yes No
How concerned are you that the CFO and finance group are routinely working extraordinary hours
—potentially impacting their effectiveness and the quality of the company’s financial reporting?
While internal audit has traditionally focused on financial reporting and compliance risks, many survey respondents are not fully satisfied that internal audit plans are focused on the key risks to the business.
And although audit committees generally are satisfied with the support they receive from their external auditor, many survey respondents said they would like to hear more from their auditor regarding meeting agendas, information quality, current developments, and the bench strength of the CFO/finance team.
44%Somewhat concerned 49% Not
concerned
Concerned 7%
Management View
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
How confident are you that your company’s chief audit executive would report any controversial issues involving senior management directly to the audit committee?
Confident85%
13%
2% Not confident Somewhat
confident
Does your audit committee share with the external auditor—in advance—the performance objectives against which the audit committee will evaluate the external auditor’s performance for the coming year?
42%
Yes 58%
No
How satisfied are you with the support your audit committee receives from the external audit firm’s resources and technical specialists, including the firm’s national office?
84% Satisfied
14%
2% Not satisfied Somewhat
satisfied
How satisfied are you that your company’s internal audit plan is risk-based and focuses on the critical risks to the enterprise—strategic and operational risks, as well as financial reporting and compliance risks?
5%
Not satisfied
31% 64%
Satisfied Somewhat
satisfied
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
How satisfied are you with the level of
transparency—i.e., open and frank communications and information flow—between the CFO/finance organization and the audit committee?
Does your audit committee’s evaluation process for the external auditor include clear performance objectives against which the external auditor’s performance is rigorously evaluated?
46%
Yes 54%
No
How satisfied are you with the level of
transparency—i.e., open and frank communications and information flow—between the CFO/finance organization and the audit committee?
Satisfied Somewhat
satisfied
1% Not satisfied
88%
11%
7%
24%
No 69%
Yes
No, but such a meeting would likely improve the effectiveness of the meeting/agenda
Does your audit committee chair meet with the external auditor’s lead engagement partner prior to each audit committee meeting to review in some detail the issues that will be discussed at the committee meeting?
Management View*
77%
Satisfied Somewhat
satisfied
3%Not satisfied
20%
*Among management respondents, fewer chief audit executives were
“satisfied” (74%) than were CFOs (82%).
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
How does your audit committee develop its understanding of the tone at the top and ethical culture of the company? (Select all that apply)
While most audit committee members view their committee as “effective,” they continue to cite opportunities for improvement.
As in past years, virtually all survey respondents this year rate their audit committee as “effective.” Nevertheless, they also say the committee’s effectiveness would be improved by better information flow and information quality, agendas that are more focused on key issues facing the business versus “checklist” items, and a better understanding of the company’s strategy and related risks.
And while less than half are satisfied with their committee’s self-evaluation process, more audit committees are evaluating the performance and effectiveness of individual members.
Audit Committee Performance
95%
88%
78%
78%
55%
39%
25%
1%
Employee surveys Communications
with employees below C-level Visit company sites and locations
Frequent informal communications with the CEO, CFO, and other senior executives
Obtain input of external auditor Monitor employee complaints, including whistleblower hotline complaints Obtain input of internal auditor
Other
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To what extent do the dynamics of your audit committee result in “group think,” and discourage contrarian views?
67%
Not at all
25%
8%
Somewhat To a great extent
How would you rate the overall effectiveness of your audit committee?
How satisfied are you that your audit committee’s current self-evaluation approach enhances its effectiveness?
Does your board/audit committee use an electronic portal where directors can access confidential company information, including pre-meeting materials?
How frequently does your audit committee use
consent agendas as a means to make official decisions on routine matters?
At every meeting
65% 27%
Never
At some meetings 8%
Does your audit committee evaluate the
performance and effectiveness of individual audit committee members?
29% Yes
13%
58%
No, but we are considering individual audit committee member evaluations
No, and we are not considering individual audit committee member evaluations 38% 48%
6%
8%
We have not implemented an audit committee self-evaluation process
satisfiedNot
Satisfied Somewhat
satisfied
94%
6%
Somewhat
effective <1% Not effective
Effective
35%
Yes 55%
No
No, but considering a board portal
10%
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
Does your audit committee regularly schedule time at the beginning of each meeting to reassess the agenda for the meeting (after committee members have had the opportunity to review the pre-meeting materials)?
45%
55% Yes No
Which of the following would most improve the effectiveness and efficiency of your audit committee meetings? (Select all that apply)
Over the past three years, what approaches has your audit committee used to conduct its self-evaluation?
(Select all that apply)
83%
20%
18%
Other 11%
Questionnaires completed by audit committee members
*360 degree evaluations
Confidential interviews with audit committee members
*in which audit committee has solicited feedback regarding the committee’s performance from committee members, other directors, as well as management who interact with the audit committee
Going forward, what would most improve the effectiveness of your audit committee? (Select two)
*(greater focus on “what’s important” less on “checklist”) 42%
40%
38%
18%
11%
More independent, effective committee leadership
Other 13%
Better understanding of the company’s strategy and related risks
*Improved committee agendas
**Better information flow
More support/resources for the committee
***Better committee composition
5%
*** (right mix of members, relevant experience, skill sets)
**(higher quality, variety of sources, and “internal transparency”)
Higher quality/more timely pre-meeting materials
More effective use of executive sessions
Better dynamics/
open dialogue
50%
13%
12%
18%
32%
28%
Better prioritization of issues More time spent discussing
issues/asking questions versus listening to presentations
Other
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
Three developing issues—sustainability/corporate social responsibility, social media networks, and IFRS—may require more immediate consideration.
These three issues received limited attention by the audit committee or board over the past year, according to survey respondents. Yet each may pose significant challenges for companies in the near term, and should be on every audit committee’s radar.
• Sustainability/corporate social responsibility issues are increasingly part of the company-shareholder-marketplace dialogue; yet only one quarter of survey respondents said these issues are addressed in the company’s disclosures.
• The use of social media networks—e.g., Twitter and others
—may pose significant compliance, privacy, and financial communications/disclosure issues; yet only one in ten survey respondents said the audit committee has discussed the company’s policies on the use of social media.
• Continued focus by the SEC and others on the possible transition of U.S. GAAP to IFRS points to the need for audit committees to understand their company’s transition plans when/if required to make such a transition. One in three survey respondents said their company has not begun work on a transition plan.
What is the status of your company’s plans for transitioning from U.S. GAAP to IFRS if and when required to do so (or if the option becomes available and the company elects to do so)?
To what extent does the audit committee/board address sustainability/corporate social responsibility issues?
Has your audit committee/board discussed the company’s policy on the use of Twitter and other social media networks to reach investors and customers?
Yes 9%
91% No
On the Horizon
Company is in the early 42%
stages of developing a transition plan Plans are not completed, but
company has undertaken significant planning efforts
Company has substantially completed plans for transitioning to IFRS
Company has not begun work on a transition plan
22%
6%
30%
Sustainability/social responsibility addressed in company’s disclosures
Discussed by audit committee/board, but not included in disclosures Not discussed by audit
committee/board, but should be Not discussed by audit
committee/board
24%
25%
13%
38%
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
Preparing for the Challenges Ahead: Key Questions for Audit Committees to Consider
For audit committees, the year ahead will pose formidable challenges as they help guide their companies through a difficult economic environment.
A number of panelists attending our 2010 Audit Committee Issues Conference emphasized the importance of focusing on the culture of the organization—particularly during a period of economic uncertainty and high expectations for results. As one panel member said, “If something is going to go wrong, more than likely it will be because of a problem in the tone at the top, culture, or incentive structure.”
They also emphasized “audit committee effectiveness”—and posed a number of questions for audit committees to consider as they monitor their committee’s effectiveness in the year ahead. These questions—coupled with our survey results—provide the basis for a robust discussion among audit committee members regarding the
“effectiveness” of their own committee:
• Do we have the right people on the committee—who understand the business and are willing and able to ask the right questions?
• Is each member of the committee capable of understanding the financial reporting issues and complexities arising from the company’s business activities?
• Do we take an active role in determining the committee’s agenda and defining its information requirements?
• Do we have the right relationship with management? Is it clear who works for whom?
• Do we insist on transparency, both internal transparency—
between management and the audit committee—and external transparency?
• Do we speak our minds? Do we listen? Do we build consensus?
• Do we take a hard look at our committee’s performance, and assess the performance of individual committee members?
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
Survey Sponsors
KPMG’s Audit Committee Institute (ACI)
The Audit Committee Institute provides information, resources, and knowledge-sharing opportunities—both on line and through a variety of forums—to help audit committee members, directors, and senior management enhance the effectiveness, integrity, and oversight of the financial reporting process.
www.auditcommitteeinstitute.com
National Association of Corporate Directors (NACD)
NACD is a national nonprofit membership organization, dedicated exclusively to serving the corporate governance needs of corporate boards and individual board members. With 10,000 members representing the boards of companies ranging from Fortune 100 to smaller public companies, private companies, and not-for-profit organizations, NACD promotes high professional board standards, enhances director effectiveness, and educates boards and directors on traditional and emerging issues.
www.nacdonline.org
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
The National Association of Corporate Directors is separate and distinct from KPMG International Cooperative (“KPMG International”) and its member firms.. KPMG LLP (U.S.) does not offer legal services.
© 2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 21593NSS