In my view: Managing risk is top of the agenda
1 Jul 08
Lorraine Bennett looks at the increasing challenges facing auditors and audit committees as the credit crunch bites
by Lorraine Bennett
With the credit crunch showing no signs of diminishing and an economic slowdown taking hold, risk management is, unsurprisingly, making it to the top of audit committee members’ agendas.
Risk management is the clear top priority for respondents to the annual Audit Committee Member Survey by KPMG’s Audit Committee Institute (ACI), ahead of the more traditional areas of accounting judgements and estimates, and internal controls.
The survey of nearly 150 UK audit committee members of public companies, and over 1,000 members globally, also revealed that nearly two thirds were concerned that the personal risk of the job has increased over the past year. Three quarters believe they face greater risks and legal obligations than other board members.
From corporate to personal – risk management is this year’s hot topic. Auditors are under increasing pressure to ensure their financial reporting is up to scratch. With well documented cases of businesses that failed to effectively manage risk at the beginning of the sub-prime fallout, the heat is well and truly on. With the credit crunch has come increasing awareness of significant business risks and their potential impact, and heightened scrutiny of risk management across a business.
Over half of the survey respondents expressed concern that the audit committee has been assigned, or has assumed, too much responsibility for risk oversight, and many said the communication and co-ordination of risk oversight among the audit committee, board, and other committees could be improved.
Fears were also raised that committees’ effectiveness may be hampered – or harmed – by overloaded agendas, compliance activities that distract from substantive issues, and inadequate communication and co-ordination.
One responsibility that is falling to audit committees is oversight of compensation plans. Audit committees are being called on to assess the risks associated with the company’s incentive structure, traditionally in the remit of the remuneration committee. In addition to risks associated with an emphasis on short-term earnings, audit committees want to understand better the behaviour and risks that the company’s incentive plans encourage and whether they are appropriate
As the role of audit diversifies, it is vital for the profession to stay one step ahead. However, according to our research, nearly 40 per cent of members say they are satisfied with management’s efforts to educate the audit committee on relevant topics, but 60 per cent cite room for improvement. One in ten received no in-house professional development during the year – the average was 12 hours.
Professional development is an area of increased importance and focus, as corporate governance evolves. Both the Higgs Report and the Smith Guidance recommend regular updates, particularly for audit committee members. At KPMG, we sponsor the ACI, which aims to be the first point of call for any audit committee member wishing to improve governance in their organisation. The ACI shares best practice with audit committee members, debates issues of concern and develops practical ways of enhancing audit committee effectiveness and the functioning of the capital markets.
It is not all bad news. Nine out of ten members say their audit committee is more effective than it was five years ago – half that it is much more effective.
However, only 46 per cent claim to be very satisfied that their company has an effective process to identify potentially significant business risks; and only 38 per cent are very satisfied with the risk reports they receive.
So it is easy to see why many, prompted by the increased scrutiny on risk processes that has evolved from the credit crunch, are taking on responsibilities outwith their traditional remit. For most managements, the current business environment poses a major challenge – and the pressures to meet expectations will probably increase, making it imperative that the CFO, internal audit, and financial management team have what they need to succeed.