Nine out of ten audit committee members say that the recession has increased the risk of earnings management and other misconduct – and yet fraud risk was the issue committees felt they were least effective at overseeing.
Research by KPMG’s Audit Committee Institute amongst 1,000 audit committee members in 25 countries has found that the economic downturn has caused them to reappraise many fundamental processes, including the external audit itself.
Two thirds (66 percent) of UK audit committee members say that the downturn has led them to reassess the company’s external audit plans, and even more (71 percent) have reassessed internal audit plans. Over eight in ten (82 percent) say the recession has led them to reappraise the adequacy and effectiveness of the company’s governance processes for managing risk, and eighty five percent report that the downturn has resulted in the audit committee having more involvement with management.
Tim Copnell, director of KPMG’s Audit Committee Institute in the UK, said: “There is no doubt that audit committees, like company boards themselves, have been feeling the pressure of the extreme economic conditions of the last year. No company can afford to be complacent, and as every company operates within a web of relationships and contracts, risks and vulnerabilities could come from almost any angle. That is why committees have been in some cases fundamentally reappraising aspects of the internal and external audit.”
KPMG’s research found that exposure to third parties in financial distress, and commodity and procurement risks, were the two areas in which UK committees felt they least understood management’s approach.
Commenting on the pressure faced by audit committees, Copnell said “There is no doubt that audit committee members face challenging workloads, even more so given the constraints on their time. Most committees met five times or fewer last year, and the majority of members (59 percent) spent up to fifty hours in total fulfilling their duties. With so much to get through in such a short time, it is perhaps no wonder that half of audit committee members say they have no time to discuss broader topical or ‘front of mind’ issues beyond their immediate agenda items.”
KPMG’s research also found that diversity remains in short supply. Seventy nine percent of respondents said that there are no women on their audit committee, and 82 percent have no one from a minority background.
Tim Copnell concluded: “Being on an audit committee has become harder than ever. It is a role where the responsibility is much greater than the reward. Part time non-executive directors will never be able to prevent all corporate governance breakdowns. But it is encouraging to see that audit committees have been reassessing what they do and how they do it with the aim of minimising the risks to a company and, by extension, to its investors and shareholders.”