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The annual Audit Committee Member Survey conducted by KPMG’s Audit Committee Institute (ACI)- in which nearly 150 UK audit committee members of public companies, and over 1,000 audit committee members globally, shared their perspectives and priorities for the year ahead – revealed that risk management is now the clear first priority of audit committee members, ahead of the more traditional areas of accounting judgements and estimates, and internal controls.

Fallout from sub-prime exposure and the credit crunch 

In addition, only 46 per cent of audit committee members are very satisfied that their company has an effective process to identify the potentially significant business risks facing the company; and only 38 per cent are very satisfied with the risk reports they receive from management.

The prominence of risk management on audit committee agendas this year is likely fuelled by a number of factors, including the fallout from sub-prime exposure and the credit crunch, increasing awareness of significant business risks and their potential impact, and heightened scrutiny of risk management and its oversight, particularly given the perceived shortcomings of risk management processes during the sub-prime crisis.

Tim Copnell, head of KPMG’s Audit Committee Institute in the UK, said that recession-related risks as well as the quality of the company’s risk intelligence were two of the major oversight concerns for audit committee members.

He pointed out, however, that there was also concern about the culture, tone, and incentives underlying the company’s risk environment, with many saying the board and/or audit committee needs to improve their effectiveness in addressing risks that may be driven by the company’s incentive compensation structure.

Too much responsibility for risk oversight 

Copnell explained that while oversight of compensation plans may generally fall within the responsibility of the remuneration committee, audit committees were focusing on the risks associated with the company’s incentive compensation structure.

“In addition to risks associated with an emphasis on short-term earnings, audit committees want to better understand the behaviour and risks that the company’s incentive plans encourage and whether such risks are appropriate,” he added.

Notwithstanding the oversight of risk management being top of the audit committee’s agenda, over half of the Annual Survey respondents expressed some concern that the audit committee has been assigned, or has assumed, too much responsibility for risk oversight (beyond financial reporting risk), and many said the communication and coordination of risk oversight activities among the audit committee, board, and other committees could be improved.

For most companies, the current business environment poses a major challenge for management – and the pressures to meet expectations will likely increase.

Increased complexity and pressures on companies - financial, regulatory, and strategic – make it imperative that the CFO, internal audit, and financial management team have what they need to succeed. 

Greater risk and legal obligations than other members of the board 

Around two-thirds of audit committee members responding to the ACI survey were very confident that the CFO had the resources to carry out their responsibilities effectively. 

Only twenty percent, however, said they were very satisfied with their company’s succession plans for the CFO.

Nearly two thirds of respondents are also concerned that the personal risk attached to being an audit committee member has increased over the last year.

Three quarters believe they face greater risks and legal obligations than other members of the board.

Nine out of every ten audit committee members say their audit committee is more effective than it was five years ago - with just over half saying the committee is “much more effective.” 

Audit committee members, by and large, are most confident in their oversight of “traditional” financial reporting matters, including accounting judgments and estimates, and internal controls and regulatory compliance.

“Many say, however, that the committee’s effectiveness may be hampered - or negatively impacted - by overloaded agendas, compliance activities that at times detract from substantive discussion of issues, and inadequate communication and coordination of oversight activities with the board and other standing committees,” Copnell concluded.

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Related links 

• KPMG
• Audit Committee Member Survey 2008