Learning the Lessons: Alan Cameron on Audit Committees at the joint IGAP & CPA Australia Annual Forum.

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Camerron photoAlan Cameron AO used his address to the IGAP and CPA Australia Annual Forum in 2014 on ‘The evolving role of audit committees’ to draw lessons from the HIH and Centro cases for contemporary audit committees.

Cameron is current Chair of the ASX Corporate Governance Council and several large public companies, and also a former Deputy Chancellor of the University of Sydney.

He addressed the IGAP and CPA Australia Annual Forum in his personal capacity, drawing on his extensive experience to provide insights into what the Centro and HIH judgements reveal about good audit committee practice.

Cameron’s keynote address emphasised directors’ role in addressing governance issues early, rather than becoming ‘gatekeepers’ after the fact:

‘To me gatekeepers are auditors and regulators and other people who look at the results afterwards. I think directors are rather earlier in the line than gatekeepers’.

Looking back over the Centro and HIH cases, Cameron highlighted three key lessons for how boards and audit committees can best execute their functions.

  1. Keeping the board and audit committee separate

The HIH judgement underscored how audit committees need to meet separately from the board if the accounts are to be examined rigorously. In Cameron’s words:

‘If the whole board is involved in the work of the audit committee, the audit committee is not doing its job. Its job is to have a first detailed look and if the whole board is there all the time as a matter of routine that isn’t going to happen’.

‘To me a troubling aspect of the processes of the HIH audit committee was its practice of meeting before and effectively in the presence of the board. As a result of that practice it operated as little more than an extension of the board… I see that now all over the place’.

  1. Making time to review financial reports properly

Another impediment to rigorously examining the accounts is not allowing the audit committee and the board time to consider the financials properly. Among other issues, the HIH judgement criticised ‘the practice of the six monthly financial reports being considered by the audit committee, approved by the board and announced all on the same day’.

Not only do directors need time between meetings to adequately review the financial reports, they also need time to access the right people:

‘The audit committee should meet auditors in the absence of management before or in the course of each meeting or at least from time to time. The material should be distributed well in advance of a committee meeting’

  1. A clear audit committee charter

Cameron’s analysis of the HIH judgement also highlighted the absence of a clear role for the audit committee in that company. By contrast, a clear and detailed charter can help define and clarify the audit committee’s role:

‘The [HIH] charter is short and the terms of reference are couched in general language. They do not clearly define and establish the role and responsibilities of the committee and its relationship to the board. There is no evidence that the terms were reviewed annually to see that the committee in its role remained relevant to the needs of HIH. So I think the clear message from that is short might be dangerous. You do need to review it every year’.

Learning the Lessons

Although Cameron’s address focused on audit-committee practice, he also reminded participants of the whole board’s responsibilities under law:

‘Whilst an audit committee has an important role of monitoring oversight that is not to the exclusion of the role of a director to consider the financial accounts for him or herself’.

Cameron concluded by highlighting several practices that directors might adopt, including:

  • Insisting on reviewing paper copies of the reports;
  • Checking organisations’ systems for dealing with whistle-blowers; and
  • Paying attention to internal audit.

Ultimately though, Cameron stressed that there is no substitute for directors using their limited time to investigate the right issues:

‘We can set up all these structures, but if people don’t ask the right questions, and be appropriately sceptical, then you will still have these problems’

What does the market expect of audit committees? Michael Coleman at the joint IGAP & CPA Australia Annual Forum.

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MC picWhat does the market expect of audit committees? Increasingly, ‘everything’, Michael Coleman told the Annual Forum, held in October, 2014.

The joint IGAP and CPA Australia Annual Forum gathers leaders from industry, the accounting profession and academia to address key issues in contemporary governance and performance.

This year’s topic – ‘The  evolving role of audit committees’ – explored how audit committees are responding to rapidly evolving risks, liability, technological advancements and complexity in reporting, among a myriad of other challenges.

Coleman was Chair of the Financial Reporting Council (FRC), sits on a number of prestigious boards and has also had 30 years as an audit partner. He used his keynote address to highlight a potential expectations gap between what markets expect of audit committees and what directors can reasonably deliver.

Coleman highlighted several key challenges that audit committees are facing:

  • Changing expectations of regulators and the market; for example, that audit committees should be satisfied that auditors are doing their job or commenting on financial reviews;
  • A greater focus on risk; and
  • The proliferation of reports (e.g. Integrated Reporting).

A particular difficulty Coleman highlighted is the expectations for audit committees to form a judgement on audit quality:

“So whether it’s a good audit or not a good audit is a tough one and this is something that as audit committees we’re probably going to have to take a reasonable amount of time to consider.”

“We need to question amongst other things whether or not the auditor has been sufficiently sceptical. Now, how does an auditor demonstrate to the board that they’ve been sceptical?”

Coleman also highlighted how Australia has to some extent followed the United States trend of increasing the responsibilities of audit committees:

“In particular in my experience it’s become common for audit committees to approve fees over a certain level in relation to non-audit services provided by the auditor and audit committees have taken on a far more extensive role in relation to overseeing the financials.”

However, unlike in the United States, Australia still sees the audit committee as a sub-committee of the board:

“It’s not a separate creature, it’s not a separate animal and so therefore, and especially following Centro, we have the situation where boards, very, very rigorously in my experience, are actually as a whole considering the financials.

“The audit committee might look at the detail, but then the board as a whole still wishes to satisfy itself that it’s actually doing the right thing.”

Finally, Coleman observed how the expectations on audit committees would continue to evolve in the future with the release of a new auditing reporting standard in June 2016, which “will require the auditor’s report to include commentary on their key audit matters”. The new standards are likely to some interesting discussions, and to some changes to the dynamic of the relationship between the auditor and audit committee.