SEC Chief Accountant Wes Bricker’s remarks earlier this week before the Institute of Management Accountant’s 2018 Annual Conference and Expo: “Advancing the Purpose and Promise of Those Involved in Financial Reporting” covered the gamut of key ingredients for effective financial reporting management and oversight - including coordination & collaboration among the various stakeholders, internal controls, books & records, ethics & culture (see SEC Chair Clayton’s recent remarks on that topic here), and audit committee and auditor roles and responsibilities.
This excerpt on audit committee oversight is share-worthy:
Companies and directors should carefully choose who serves on their audit committee, selecting those who have the time, commitment, and experience to do the job well. Just meeting the technical requirements of financial literacy may not be enough to understand the financial reporting requirements fully or to challenge senior management on major, complex decisions.
Audit committees of every company must be committed to their oversight of financial reporting. They must, for example, be able to adequately review how management is designing and implementing internal controls. As I mentioned earlier, the responsibility to maintain internal controls is incumbent upon management, with oversight of the audit committee, regardless of the size of the company.
As part of their oversight of the external audit, audit committees can make a positive impact on financial reporting by asking probing questions of external auditors about the auditor’s risk assessment and strategy undertaken for the audit. For example,
- In an audit of the financial statements, was the external auditor able to rely on a company’s internal control over financial reporting?
- If not, which of the business processes included the internal controls on which the auditor did not (or could not) place reliance? What were the factors that prevented reliance?
- Were any significant deficiencies or material weaknesses identified (and communicated in writing)?
- How did management consider that feedback in preparing the financial statements, including in its period end closing processes?
Audit committees can take insights from the conversation with auditors about whether, where, and why they were unable to rely on internal controls. The audit committee’s expectations for clear and candid communications from the auditor and management in this area should not be taken lightly, particularly when it is time to evaluate the relationship with the auditor. Just the same, the auditor should expect appropriate support and tone from audit committees when internal control or other matters arise.
See also the OCA’s recently-introduced graphs on the financial-reporting structure, and an abundance of additional resources on our Audit Committees, Auditing & Audit Firms, Compliance & Ethics, Corporate Culture, and Financial Reporting pages.