Current Board and Audit Committee Trends and Issues...Board, or through a separate risk committee, or the audit committee, for example.” • “Companies may want to address whether

Current Board and Audit Committee Trends and Issues

A discussion with HCCA

October 1, 2010

PwC

For today’s discussion

I. Challenges for boards and audit committees

A. Economic climate

B. Communications and disclosures

C. Increased focus on corporate wrongdoing

II. Risk Management – The issue of the year

III. Summary of Audit Committee Roles

PricewaterhouseCoopers

III. Summary of Audit Committee Roles

IV. Corporate Governance Hot Topics

V. Appendices

A. Proxy Advisory Firms

B. Benchmark Data

C. Leading Practices for Audit Committees

D. Resources

2

I. Challenges for boards and audit committees

PwC3

A. Current economic climate

• Presents numerous financial reporting challenges

- Impairments

• Goodwill

• Intangibles

• Long-lived assets

- Valuation allowances on deferred tax assets

- Restructuring charges

- Counterparty credit risks

PricewaterhouseCoopers 4

- Counterparty credit risks

- Financial difficulties of customers

• Changing sources of liquidity

- Credit crunch

- Covenant violations

- Debt restructurings

- Private placements

- Supply chain management

• Alternative sourcing models

A. Current economic climate (continued)


• Alternative sourcing models

- Emerging countries

- Shared-service centers

• New accounting pronouncements already effective

• Major changes coming – increasing pace and significance

- Leasing

- Revenue recognition

- IFRS

• Disclosure of key information

- Liquidity risks and changing sources of liquidity

- Management of market risk exposures

- Going concern considerations

- “Early warning” of anticipated events

- SEC lawsuit against state of NJ ($26 billion of bond sales during 7 years)

• Left false impression retirement plans were adequately funded when budget

B. Heightened focus on financial communications and disclosures


• Left false impression retirement plans were adequately funded when budget changes or tax increases were required

• Increased scrutiny by regulators

- Adequacy of disclosures during changing conditions

- Earnings releases

- MD&A

- Non-GAAP disclosures and special charges

C. Increased global focus on corporate wrong-doing

• Marked increase in U.S. government activity around antitrust and anticorruption issues, across industries; record corruption fines during 2009

• A growing number of national anti-competition authorities such as those in Brazil, Canada, China, Japan and Australia are more active and aggressive in identifying and prosecuting anti-competitive behavior

• Tax agencies in the U.S. and around the world are sharing information to


• Tax agencies in the U.S. and around the world are sharing information to enhance examinations

7

II. Focus on risk management continues to intensify --

Setting the Stage

1Regulators and stakeholders (including credit rating agencies) have taken notice of risk management.

2002 Sarbanes Oxley Act and subsequent PCAOB guidance

2003 NYSE Governance requirements updated

2004 COSO publishes the Enterprise Risk Management Framework and Application Guidance

Three key trends have emerged:


3Risk management is emerging as a strategic activity – integrated with performance measurement and reward.

2 Boards are actively engaging in the topic, driven both by regulatory uncertainty and the economic environment.

2008 S&P announces it will evaluate Enterprise Risk Management capability as part of ratings for non financial companies

2009 Senator Chuck Schumer (NY) releases draft bill, “The Shareholder Bill of Rights”

2009 SEC releases enhancements to proxy and disclosure rules (33-9502) including discussion of the Board’s role in risk management and compensation linkage to risk

8

Board agendas are evolvingSetting the Stage

Source: PwC’s 13th Annual Global CEO Survey


2010 State of the Profession9

A look at the SEC’s Proxy Disclosure Requirement related to the Board’s role in Risk Oversight

Setting the Stage

“. . . disclose the extent of the board’s role in the risk oversight of the Registrant, such as how the board administers its oversight function, and the effect that this has on the board’s leadership structure.”

- § 299.407 (Item 407) Corporate Governance

In discussion on final rules, the Agency’s


In discussion on final rules, the Agency’s commentary touched specifically on:

• “. . . how the Board administers its risk oversight function, such as through the whole Board, or through a separate risk committee, or the audit committee, for example.”

• “Companies may want to address whether the individuals who supervise the day-to-day risk management responsibilities report directly to the board as a whole or to a board committee. . . ”

10

Our analysis of 100 S&P filers considered the impact of three attributes in the disclosures related to the Board’s risk oversight responsibility

Insights from Recent Proxy Filings

Risk oversight ownership at the board level is clearly articulated

The role of committees in supporting risk oversight is discussed

1

2


The role of committees in supporting risk oversight is discussed

Management’s role in supporting the Board’s risk oversight responsibility is discussed in the disclosure

2

3

11


“… the Board of Directors has ultimate oversight responsibility for the risk management process…”

“…Our Board of Directors is responsible for consideration and

The overwhelming majority of registrants made clear statements noting that the entire Board

held responsibility for risk oversight.

The industry in which the registrant operated

Risk oversight ownership at the board level is clearly articulated1


oversight of risks facing [the Company].”

“Ultimately, the full Board has responsibility for risk oversight…”

“…the full Board of Directors has overall responsibility for the oversight of risk management at [the Company].”

- Source: Proxy Filings (Multiple)

The industry in which the registrant operated

had no discernable impact on whether this ownership by the full board was noted in the disclosure.

Statements related to the oversight responsibility of the full Board often included the delegation

of responsibility to certain committees

12


The role of committees in supporting risk oversight was discussed2

“The Board of Directors administers its risk oversight function primarily through the Audit Committee…”

“…the Governance Committee assumed responsibility for

In all but a small number of disclosures, the

audit committee was noted as having a role in support of the Board’s risk oversight responsibility.

After the audit committee, the compensation

committee was most often identified with

specific responsibilities supporting the Board’s


assumed responsibility for overseeing the Board’s execution of its risk management oversight responsibility.”

“Risk oversight is conducted both by the Committees of the Board with respect to their areas of responsibility as well as by the full Board.”


specific responsibilities supporting the Board’s role in risk oversight.

Other committees were noted in more than

half of the disclosures, including: Finance, Public Policy, Executive, Corporate Responsibility, and Sustainability.

Risk committees were relatively uncommon,

and when identified they were significantly more prevalent in the financial services, utilities and energy sectors. .

13


Management’s role in supporting the Board’s risk oversight responsibility is discussed in the disclosure

3

“Our [Risk] Committee, consisting of management members from key business units . . . identifies key risks for review and updates our policies in risk management areas...”

In nearly all of the disclosures we reviewed, management’s responsibility with regard to supporting the Board’s oversight of risk was noted.

Discussion of a “Chief Risk Officer” was

infrequent, and when noted was most often in


“The Company’s risk management process is intended to ensure that risks are taken knowingly and purposefully…[the] framework includes both senior-management level and division level risk committees that are cross-functional and geographically diverse …”


infrequent, and when noted was most often in the financial services industry.

Specific reference to management roles

varied in the disclosures. References included the role of the Chief Audit Executive, Treasury, the CFO, and the Chief Compliance / Ethics Officers, among others.

14

Focus on enabling better decision-making. Pursue not better reports, but better clarity around risks and greater confidence in decisions. (Taking the right risks)

Leading practices to address five common pitfalls . . .

Focus on process, methodology and tools, emphasizing frameworks, models and reporting.

PITFALL LEADING PRACTICE

Robust risk assessment is a starting point. Risk management ultimately requires decisions around resource allocations. (Management vs. assessment)

Risk assessment as a destination.

What Effective Risk Management Looks Like


resource allocations. (Management vs. assessment)

Focus on risk management as a management and

organizational competency, not a department. (Capability vs. function).

Risk management is an organizational function or department.

Practical program capability and design, adapted to

organizational culture and embedded in existing management models. (Emphasis on culture)

Rigid program design

emphasizing reporting structures and processes.

Organizations face many risks -- risk taking is

necessary for value creation. Prioritize risks and escalate the strategic issues. (Focus on the big picture)

Escalating the wrong risks,

with emphasis on detailed risk reports without prioritization.

III. Summary of audit committee roles

Foundation Core responsibilities

(Listing exchange dependent)

Charter

• Requirements- SEC- Exchange

• Transparency

Membership

• Independence

Financial Reporting

•10Ks & 10Qs•MD&A•Critical accounting policies & judgments

•Press releases•Earnings

Oversight of External Auditors

•Select•Pre-approve services & fees

• Independence•Audit issues•Evaluate performance

Oversight of Internal Auditors

•Plans, resources•Hiring, replacement of IA director

•Significant results•Evaluate performance

•Executive sessions

Oversight of Management

•Tone at the top•Respective roles•Bench strength of Finance dept

•Succession•Executive sessions

Other

•Whistleblower hotline, complaint process

•Compliance with laws & regulations

•Risk management•Related party transactions

PricewaterhouseCoopers16

• Independence• Financial literacy• Financial

expertise• Age/tenure• Chair• Other attributes

Orientation

• Financial reporting

• Key players• Process

•Earnings guidance

performance•Executive sessions

•Executive sessions sessions transactions•Reporting to board

Related processes

Meetings

•Attendees•Frequency•Length•Schedule•Agenda setting•Executive sessions

Information

•Quality•Level of detail•Timeliness•Retention and notes•Minutes

Performance

•Annual assessment•Charter review•Ongoing education

Other

•Authority to hire experts

•Funding

IV. Corporate Governance Hot Topics

Discussion agenda

• Executive compensation

- Say on pay

• Director elections

- Proxy access

- Broker voting and majority voting

- Expanded disclosures about directors and board diversity

Corporate Governance Hot Topics


- Expanded disclosures about directors and board diversity

• Board leadership

• Governance elements of the Dodd-Frank Act

• Concept Release on US Proxy System (Proxy Plumbing)

17

Executive Compensation

• Currently the hottest governance issue

• Viewed as a proxy for board effectiveness

• Focus is on:

- Elements of pay (e.g., tax gross-ups and personal aircraft use)

- Pay for performance

- Clawback provisions

- Link between incentives and risk-taking for all employees – not just the executive suite (*)

- Compensation committee independence

- Compensation consultants (*)



- Compensation consultants (*)

• Provisions of the Dodd-Frank Act :

- Mandates companies adopt a clawback policy

- Increases independence standards for compensation committees

- Authorizes compensation committees to retain, compensate and oversee consultants and advisors after considering independence

- Enhances executive compensation disclosures

- Requires disclosure of hedging by employees and directors of equity securities granted by the company as part of compensation

(*) Items subject to disclosure starting in 2010 proxy season

Executive Compensation - Say on Pay

• Advisory vote (i.e., nonbinding) on the pay of the top executives

• Issue has been gaining momentum for a few years

• 60 Say on pay proposals in 2010 proxy season

• Regulatory initiatives

- Say on pay is required for TARP recipients



- Say on pay is required for TARP recipients

- Dodd-Frank Act requires say on pay for executive compensation and golden parachutes

• UK, Australia and Netherlands have Say on pay

Proxy Access

• The right of shareholders to place their director nominees – in opposition to the company’s nominees – in the company’s proxy statement

• Dodd-Frank gave SEC authority to adopt proxy access rules

• New rules issued August 25, will be effective 60 days after publication in the federal register (will be effective for calendar year–end companies for next proxy season)

• To nominate director(s) under the new rules, a shareholder or group of shareholders must

Director elections


hold at least 3% of shares for at least three years prior to the date the shareholder(s) submits notice of its intent to use the rule. Ownership must continue through the date of the meeting.

• Shareholders cannot be holding securities with the intent of effecting a change in control

• Notice must be submitted between 150 and 120 days prior to the anniversary date of issuance of the prior year’s proxy

• Shareholders may nominate the greater of 1 director or 25% of the existing board

• Smaller reporting companies will not be subject to the rule until three years after its effective date

Proxy Access (continued)

• Nominating shareholders will be required to disclose the following:

- amount and percentage of the voting power of their shares

- length of time owned

- a statement that they will continue to hold the shares through the date of the shareholder meeting

• Nominating shareholder and nominees will also have to certify the accuracy of

Director elections


• Nominating shareholder and nominees will also have to certify the accuracy of the information and the eligibility of the nominee

• Nominating shareholder will be liable for any false or misleading statements –not the company

• Company will provide information in the proxy material about the nominating shareholder and nominee, which is similar to disclosure currently required in a contested director election

21

Director Elections - Broker Voting and Majority Voting

• For NYSE registered brokers, new rules enacted in 2009 eliminate the practice of brokers voting uninstructed shares at their discretion in uncontested director elections

• Typically, brokers voted uninstructed shares per the company’s recommendations

• Dodd-Frank Act expands the practice to eliminate broker voting for say-on-pay shareholder votes



shareholder votes

• Greater risk for a director not to be re-elected if targeted with a “vote no” campaign by proxy advisory firms and institutional shareholders

• Surprisingly the Dodd-Frank Act did not address majority voting

Director Elections - Expanded Disclosures about Directors and Board Diversity

• For 2010, enhanced proxy disclosure

- On skill sets, experience and qualifications of individual directors

- Past directorships, involvement in legal proceedings (expanded to 10 years)

• Shareholder interest in diversity – new proxy disclosure of how the board defines diversity; presence of diversity policy



• Also focus on whether certain directors are “over-boarded” – some proxy advisory firms recommending against the election of certain directors, citing such concerns

• HR Compensation expertise – growing representation on boards

- SSBI* says 7% of board placements in 2009 had HR backgrounds (versus 3.8% in 2004)

- WSJ indicates at least 65 HR managers served on 101 boards (ten years ago only six)

* - 2009 Spencer Stuart Board Index

Board Leadership - Combining or Splitting Chair and CEO Roles

• Some believe it’s appropriate to split the CEO and board chair roles to

- Eliminate potential conflict of interest (CEO is part of management and the board oversees management)

- Potentially provide a better system of checks and balances

• Roles of CEO and board chair are combined at 63 percent of S&P 500 companies; most appoint a lead director*

• Proxy advisory firms are very active on the issue



• Proxy advisory firms are very active on the issue

- ISS’s GRId** rating system gives a higher rating to companies with an independent chair

• Many institutional investors support separation of the roles

• The role of lead director is emerging as a possible compromise

• Forced separation at some companies getting government assistance

• Starting in 2010, proxy disclosure for board leadership structure

- Dodd-Frank Act confirms disclosure requirement

* 2009 Spencer Stuart Board Index report** Governance Risk Indicators

Dodd-Frank Act

• Signed into law on July 21, 2010

• Significant governance and executive compensation-related provisions:

- Gives SEC authority to issue proxy access rules

- Requires Say on pay for executive compensation and golden parachutes

- Mandates companies to adopt a clawback policy

- Increases independence standards for compensation committees

- Authorizes compensation committees to retain, compensate and oversee compensation consultants and advisors after considering adviser's independence

- Enhances executive compensation disclosures:



- Enhances executive compensation disclosures:

• Describe the relationship between executive compensation paid and company’s performance, including stock price performance and dividend policy

• Disclose (a) the median annual total compensation of all the company’s employees except the CEO, (b) the annual total compensation of the CEO, and (c) the ratio of (a) to (b)

- Establishes new whistleblower incentive program and protections

- Requires disclosure of hedging by employees and directors of equity securities granted by the company as part of compensation

- Requires disclosure of rationale for the separation or combination of CEO and chair roles (mandate already fulfilled with SEC’s disclosure rules issued in Dec 2009)

25

SEC Concept Release on US Proxy Voting System (Proxy Plumbing)

Focuses on the accuracy and transparency of the voting process, the manner in which shareholders and corporations communicate, and the relationship between voting power and economic interest

Comment period ends 90 days after published in Federal Register (October 20, 2010)

Specific matters covered are:

• Over-voting and under-voting of shares

• Proxy vote confirmation

• Proxy voting by institutional securities lenders



• Proxy voting by institutional securities lenders

• Proxy distribution fees

• Issuers’ ability to communicate with beneficial owners of securities

• Potential means to facilitate retail investor voting participation

• Data-tagging proxy-related materials

• The role of proxy advisory firms

• Dual record date

• Empty voting

26

Appendix AProxy Advisory Firms

27

Proxy Advisory Firms

• Proxy advisory firms appear to have increasing influence

- Suggests companies may want to “reach out” to proxy advisory firms and large shareholders

• Provide recommendations on proxy votes according to its proxy voting guidelines

• Issue “withhold vote” recommendations for targeted directors

- Overboarding

- Involvement with companies that were in difficulty


- Involvement with companies that were in difficulty

• 2010 areas of focus:

- Say on pay

- Independent board chair

- Majority voting

- Classified boards

- Social responsibility issues: sustainability, climate change

• Risk Metris (aka ISS) has replaced CGQ score with GRId (Governance Risk Indicators) rating systems

Proxy advisory firms

RiskMetrics GRId

• The largest proxy advisory firm is Risk Metrics (formerly Institutional Shareholder Services –ISS)

- Covers 5700 companies across multiple markets

• Rolling out new rating system for companies: GRId (Governance Risk Indicators)

• GRId focuses on 4 areas:

- Board structure

- Shareholder rights

- Compensation


- Compensation

- Audit

• US companies will be rated based on 63 factors

• Companies will have an opportunity to check accuracy of the data RM is gathering on those items

• Coverage for US companies limited to Russell 3000 Index companies

• Full data set by December 31, 2010

RiskMetrics GRIdsample report


Appendix BGovernance Benchmarking

PwC WDT — The PricewaterhouseCoopers—Corporate Board Member 2009 What Directors Think Survey had 1,021 director responses to the What Directors Think questionnaire representing 979 boards from the top 2,000 publicly traded companies. 979 boards from the top 2,000 publicly traded companies.

SSBI — The Spencer Stuart Board Index is an annual study that examines the state of corporate governance among the S&P 500. The results quoted are for the 2009 Board Index.

NACD — The National Association of Corporate Directors 2009 Public Company Governance Survey comprises the responses of 632 survey respondents, as well as data gleaned from proxies of over 3,750 public companies.

31

Board of directors benchmarking

NACD SSBIPwC WDT

Number of meetings per year 6.1 9.0 –

Average number of hours per meeting

• 2 hours or less

• 2–4 hours

• 4–6 hours

• 6–8 hours

• 8–10 hours

• More than 10 hours

6.6

–

–

–

–

–

–

–

–

–

–

–

–

–

2%

20%

33%

25%

12%

8%


• More than 10 hours – – 8%

Board size 9.1 10.8 –

Number of independent directors

• More than 75%

• Between 50% and 75%

• Less than 50%

–

43.3%

47.5%

9.2%

–

–

–

–

–

–

–

Board of directors benchmarking (continued)

NACD SSBI

PwC

WDT

Do they have a staggered board?

• Large and Mega Cap

• Mid Cap

• Small Cap

–

27.8%

53.4%

53.5%

38%

–

–

–

–

–

–

–

On how many public boards do directors serve (including this company)?

• 1 – – 61%


• 1

• 2

• 3

• 4 or more

–

–

–

–

–

–

–

–

61%

26%

10%

3%

Combined CEO/Chair 45% 63% –

Audit committee benchmarking

NACD SSBIPwC WDT



• 2 hours or less

• 2–4 hours

3.2

–

–

-

-

-

–

16%

63%


2–4 hours

• 4–6 hours

• All day

• More than one day

–

–

–

–

-

-

-

63%

19%

1%

<1%

Audit committee size 3.9 – –

Compensation committee benchmarking

NACD SSBIPwC WDT



• 2 hours or less

• 2–4 hours

2.4

–

–

–

–

34%

60%


• 4–6 hours


–

–

–

–

6%

<1%

Committee size 3.8 – –

Corporate governance committee benchmarking

NACD SSBIPwC WDT



• 2 hours or less

• 2–4 hours

1.9

–

–

–

–

–

–

78%

22%


• 4–6 hours


–

–

–

–

1%

0%

Committee size 3.7 – –

Appendix CLeading practices for audit committees

PwC37

A. Responsibilities – financial reporting

• Core responsibility of audit committees is to oversee the integrity of the financial statements

• Transactions are extremely complex and require substantial judgment—and the public demands transparency

• Audit committees should:

- Read and discuss financial statements with management and external auditors

- Assess quality, not just reliability, of earnings


- Assess quality, not just reliability, of earnings

A. Responsibilities – financial reporting (continued)

• Effectiveness of oversight based on:

- Applying robust knowledge of company to reviewing financial reports

- Understanding how materiality is evaluated, quantitatively and qualitatively

- Understanding estimates and other areas where management applies judgment – including process surrounding key estimates. Evaluate changes during period.

- Understand impact of unique transactions recorded during the quarter


- Apply appropriate level of skepticism, ask probing questions, and engage in frank discussions with management and auditors

- Understanding significant accounting policies

• Essential to focus on critical areas and policies

• Carefully evaluate any changes or proposed changes

A. Responsibilities – financial reporting (continued)

• Understanding critical accounting policies and issues, examples:

- Deep dive – take 3 meetings to understand specific complex area like revenue recognition

- Evaluate one critical policy per meeting, as needed

- Have business unit leaders present business and risks – then have finance people show how account for it; external auditors explain key risks and audit


strategy; and internal audit explain how cover

- Focus on any changes in policies

- Compare policies to industry peers

A. Responsibilities – financial reporting

• Other keys

- Recognize financial reporting areas most susceptible to fraud

• Revenue recognition

• Expense classification

• Facilitation payments overseas

- Maintain healthy skepticism when considering the risk of fraud ― it is


- Maintain healthy skepticism when considering the risk of fraud ― it is never zero ― and understand any concerns raised by auditors

- Understand tone at the top

• Consider upward feedback or discussion with non-executives in finance

- Review significant period–to–period changes and explanations

- Understand financial targets set as part of incentive compensation

A. Responsibilities – narrative reporting and earnings guidance

• Review disclosures and consider consistency with financial statements

• Leading audit committees focus on transparency―are all significant developments fully disclosed?

• Keys

- Assess whether company is in a credible position to provide earnings


- Assess whether company is in a credible position to provide earnings guidance

- Understand nature of other financial information disclosed

- Non-GAAP measures and special items

• Earnings releases are possibly as important to investors as actual filings

A. Responsibilities – internal control reporting

• Oversee 404 reporting on the effectiveness of internal control over financial reporting

• Understand issues arising and their resolution

• Focus on areas of greatest potential risk, such as

- Management override of controls

- Outside service providers


- Outside service providers

- Information technology

- Mergers and acquisitions

• Compare sophistication of structure to peers – one size does not fit all

A. Responsibilities – compliance and ethics programs

• Many committees oversee compliance with laws and regulations

• Leading practices

- Understand design of program and how its effectiveness is maintained

- Understand significant issues and management’s investigation and follow-up

- Review trends in compliance and management’s plans to address systemic issues


issues

- Meet periodically with chief compliance officer/chief ethics officer

• FCPA investigations are increasing as is director liability

- New Federal sentencing guidelines

- New Task Force

A. Responsibilities – whistleblower and complaint hotlines

• Audit committee must establish process to receive complaints about accounting and auditing

• Information about complaints should be reported periodically to the committee, with protocols for immediate reporting if complaint is significant

• Committee should review remediation actions taken, ensuring they are


• Committee should review remediation actions taken, ensuring they are timely, consistent, and appropriate

B. Relationships – management

• Challenge is balancing advising and counselling management with fiduciary duty to monitor and oversee management

• Establish clear understanding and consensus on where management’s responsibilities end and committee’s begin

• To build trust, need strong, open communications channels with senior management—continually, not just during formal meetings


• Management should seek committee’s input in advance of key decisions

B. Relationships – management (continued)

• Consider responsibility to evaluate management

- Assess strength and performance of key finance managers at and between committee meetings

• Consider confidential feedback of internal and external auditors

- Succession planning


B. Relationships – internal audit

• To be effective, internal audit must have appropriate stature within the company. They must be empowered with the proper tone at the top.

• Accomplished by:

- Clear understanding definition of role throughout the organization

- Having internal audit director report directly to committee . Ensuring


- Having internal audit director report directly to committee . Ensuring internal audit’s continual access to committee (74% of I/A directors report to A/C chair)

- Playing key role in selection, evaluation, compensation, succession and evaluation of internal audit director

- Ensuring that top management empowers internal audit

- Informal meetings with director of internal audit

B. Relationships – internal audit (continued)

• Also key is for committee to

- Review and approve internal audit’s charter and plans

- Monitor execution of plans and approve major changes

- Understand results of audit work, with focus on most significant findings

- Ensure internal audit has budget and resources needed


- Evaluate whether recommendations are successfully implemented in a timely manner

B. Relationships – external auditors

• Report directly to committee

• Candid and ongoing communications are vital, with timely and robust dialogue on complex issues

• Review and discuss audit results and other information with external auditors, including required specific communications

• Ask the right questions:

• Any recommended disclosures not made?


• Any recommended disclosures not made?

• What areas could be challenged by regulators?

• What do you believe is the quality of reported results?

• What is your perception of tone at the top and at CFO level?

• Any pressure put on financial reporting group to hit targets?

• Did the internal rep letters include exceptions?

• What should we be asking about?

C. Supporting processes – committee composition

• Ideally independent nominating committee or independent directors select audit committee members

• Committee composition shifting over past few years

- Decrease in active board chairs, CEOs, and presidents

- Increase in retired board chairs, CEOs, and presidents

- Increase in CFOs and retired accounting firm partners, who may be able to serve as mandated “financial expert”


• Willingness to dedicate substantial time and energy

• Chair needs strong leadership qualities, objectivity, and ability to promote effective working relationships

• Increased focus on whether directors are “overboarded”

C. Supporting processes – members’ attributes

• Financial knowledge

- Good understanding of financial reporting

- Ensure no over-reliance on named “financial experts”

• Independence

- Essential, because committee must be willing to question management’s judgment or challenge its position

- Regulators and listing exchanges provide definitions of independence


• Commitment

- To understanding business

- To understanding policies and controls

- To understanding accounting and disclosures

C. Supporting processes – meeting frequency and duration

• Audit committees generally meet at least 4 times a year in person and 3 or 4 times via phone (see Appendix B)

• Frequency driven largely by

- Requirements for involvement with quarterly regulatory filings

• Most in-person meetings last 2 – 4 hours


• Meetings balance presentation and discussion

• Need sufficient time for discussion and executive sessions, including those for members only

C. Supporting processes – meeting agendas and materials

• Use scheduling calendar to drive agendas

• Involvement of committee chair is crucial

• Agendas place most important items first

• Distribute detailed written agenda, along with briefing materials, well before meeting


meeting

- Strike balance between communicating needed information and avoiding extraneous detail

- Format of information is critical

• Advance preparation by committee members

- Adherence to “no surprises” philosophy

C. Supporting processes – meeting participants

• Both internal audit director and external auditors typically attend every meeting

• Management’s participation is important

• Meet privately with internal audit director, external auditors, finance management, and others, as warranted


• Meet with certain business unit heads if their areas are complex or critical

• Meet with treasury, tax, I/R, as appropriate

• Guard against too many observers

C. Supporting processes – meeting minutes

• Consider carefully what information is captured in minutes and at what level of detail

- Most provide high-level summary of meeting discussions

• Post-meeting follow-up of unresolved items


C. Supporting processes – evaluations

• Evaluate committee performance regularly by comparing activities against

- Charter

- Leading practice

• Assess committee dynamics, not only on what the committee does, but also on how effectively it functions

• Should be robust—not simply a “check the box” exercise


• Should be robust—not simply a “check the box” exercise

• Obtain feedback from board, management, internal audit, general counsel, and external auditors

C. Supporting processes – education

• Training vital to support committee effectiveness

• Set specific educational and training objectives

• Possible venues

- Specially scheduled sessions

- Part of regular meetings


- External directors “colleges” or conferences

C. Supporting processes – education (continued)

• Ensure new members receive robust orientation

- Responsibilities

- Processes

- Relationships

• Ensure all members receive continuing education in:

- Accounting, financial reporting, and regulatory developments

- Operations of key business units and support departments


- Operations of key business units and support departments

- Key information systems, processes, and controls

- Risk identification and management, including special risk areas

- Changing governance standards

C. Supporting processes – resources and advisors

• Committees need adequate resources to support them in fulfilling their responsibilities, including formal resources in special situations

- Management lacks capability to address major issue adequately or GAAP is not clearly defined

- There is a disagreement between management and the auditors, and committee members lack needed expertise

- There is a need for a special investigation involving independent


- There is a need for a special investigation involving independent professionals

• Companies must have the authority to hire independent counsel or other advisors, with the company providing funding

Appendix DResources

61

PricewaterhouseCoopers’ governance resources

• www.pwc.com/uscorporategovernance

• www.pwc.com/10minutes

• www.pwc.com/corporatereporting

• www.cfodirect.com


PwC’s corporate governance publications

Current Developments for Directors

Year-end questions for audit committees

To the point: Current issues for Boards of Directors

Audit Committee Effectiveness: What Works Best


What Directors Think Board Governance Series

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Current Board and Audit Committee Trends and Issues...Board, or through a separate risk committee, or the audit committee, for example.” • “Companies may want to address whether

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