Your investors may ask what your audit committee is doing to ensure its work is up to scratch. Or they may ask what the committees are doing to ensure the company’s climate reporting is on point. At least, they will if they follow advice regulators published this week encouraging asset managers to interrogate audit committees.
The push comes at a time when the world of audit committee work is in a state of transition. Not only does the climate transition mean a host of non-financial reporting requirements but government and watchdogs are working on a raft of reforms that could mean new minimal standards for audit committees, new rules for internal controls reporting, and the introduction of “resilience” reports.
Add to that a drive to increase communication with investors and the landscape for audit committee chairs begins to look significantly changed. The role becomes more “outward facing”—potentially more time consuming—and will involve new skills.
It is a list of ice-breaker questions investors could pose to audit committees, published this week by the Financial Reporting Council, that heralds a step change.
Philip Fitz-Gerald, director of the FRC Lab, says: “We recognise the value of direct engagement between investors and audit committees in promoting a deeper understanding of companies and their approach to financial reporting and internal control.
“These conversation starters provide a starting point for constructive discussions, which we hope will lead to greater transparency and investor confidence.”
The audit committee has not been the usual target for investors. Historically, other leadership figures have been in demand. But some observers see audit committee chairs as increasingly important in some circumstances.
“It is safe to assume most active investors would want the ear of the CEO and/or chair at all investee companies,” says Andrew Brady, a director at SquareWell Partners, an investor advisory firm, adding that interest in audit committee work may depend on company history.
“If an investor views the oversight of the audit committee to be particularly important—maybe there were previous controversies, issues raised in the annual audit, or they operate in a sector that bears considerable regulatory risk—they may view an engagement with the audit committee to be necessary for their comfort that there is the required experience and expertise, as well as that risks are being appropriately managed and overseen.”
Daniele Vitale, head of ESG at investor advisory firm Georgeson, says: “In recent years, the FTSE has seen audit issues at some UK companies.
“Clients of institutional investors are expecting investors to manage these risks through continued open dialogue and understanding of all aspects of how a company is being managed, including the entire audit process.”
There is, however, enthusiasm in many quarters for investor-audit committee engagement. Mike Suffield, director of professional insights at ACCA, says the committee is a “key pillar” in the integrity of audit and financial reporting for current and future shareholders.
That “key” work includes discussion of external audit and issues that arise during an audit, including those that have been resolved and—perhaps more importantly—those that have not.
Updates on that discussion potentially provide “valuable information” for investors, says Suffield.
“While we understand why investors want to hear from the chairman of the board and the CEO,” he says, “hearing from the audit committee about the work they undertake provides a different perspective and a different voice. This is particularly important around the risks that the companies are facing, especially, but not exclusively, in rapidly changing and emerging areas such as cyber and sustainability.”
Hustling investors to widen their engagement to auditco members could be a significant moment for committee chairs.
Peter van Veen, ICAEW’s director for governance and stewardship, says audit committee chairs can expect further “strain”.
“This does change the audit committee chair’s remit somewhat to a more outward facing one,” he says. “Many audit committee chairs already struggle with the ever-increasing workload of the committee and the increasing regulatory requirements.
“Expecting them to also be a spokesperson for the organisation will put additional strain on their time and resources.” He added: “More fundamentally, the skills profile of the audit committee chair may also have to evolve to include investor relations skills.”
Tipping the balance
Some see the expansion of corporate reporting as a driver. “Especially,” says Andrew Brady, “as we move towards a time where it is not only financial information that is scoured by the markets, it will naturally follow that audit committees and their chairs, will need to be able to weigh their consideration between financial and non-financial risks far closer to parity.”
Daniele Vitale says remuneration committee chairs were forced to adapt and audit committee chairs may have to follow. Some sectors, he says, already consider the audit committee chair a “double role” when judging whether a director is subject to “overboarding”.
“With investors increasingly pushing for more information on board oversight of specific issues— for example, the recent renewed focus on tax disclosure—the position of auditco chair may become ever more demanding,” says Vitale.
“As a result, some investors may focus on the time commitment required of audit committee chairs and how much more time-consuming this role is, compared with a regulator non-exec role.”
The role of the audit committee chair was already evolving. A push for greater direct contact with investors may drive further development: some of it good, but most of it undoubtedly hard work.