The issues competing for time on the audit committee’s agenda — including cybersecurity and IT risks, supply chain and other operational risks, legal and regulatory compliance, climate disclosures and environmental, social and governance reporting — have become more complex and time-consuming. The audit committee must remain keenly focused on its core oversight duties: financial reporting and related internal control risks and audit quality, including setting clear expectations for the external auditor.
As companies navigate the ongoing impacts of the COVID-19 pandemic, we continue to see how important trust and transparency are, not only to the functioning of the capital markets but also to customer relationships, brand reputation, and the health and well-being of employees. For shareholders and stakeholders, much of that trust and transparency is grounded in the quality of a company’s financial reporting and disclosures and the story they tell, as the global health crisis makes the audit committee’s oversight role more challenging than ever.
As they consider their 2022 agendas, audit committees should reassess whether they have the time and expertise to oversee the other major risks competing for their attention. Do ESG issues and cybersecurity risks require attention at the full-board level, or the focus of a separate board committee? The pros and cons of creating an additional committee should be weighed carefully, but considering whether a finance, technology, risk, sustainability or other committee would improve the board’s effectiveness — and whether the board has the resident skill sets to oversee these issues — can be a healthy part of the risk oversight discussion.
As the financial reporting, accounting and disclosure impacts of COVID-19 unfold in 2022, key focus areas for the company’s 2021 10-K and 2022 filings should include:
1. Forecasting and disclosures. Due to the uncertain trajectory of COVID-19 and the economy — and the extensive use of forward-looking information in financial statements and Securities and Exchange Commission filings — COVID-related disclosures remain a top area of focus. At the same time, the strains on supply chains make financial forecasting even more difficult.
Key areas requiring audit committee attention include:
- Disclosures regarding the current and potential effects of COVID-19 (e.g. risk factors, MD&A, liquidity, results of operations, trends and uncertainties);
- Preparation of forward-looking cash-flow estimates;
- Impairment of nonfinancial assets, including goodwill and other intangible assets;
- Accounting for financial assets (fair value);
- Going concern; and,
- Non-GAAP metrics.
With companies making more tough calls, regulators are emphasizing the importance of well-reasoned judgments and transparency, including contemporaneous documentation to demonstrate that a company has applied a rigorous process. Given the fluid nature of the long-term environment, disclosure of changes in judgments, estimates and controls may be required more frequently.
2. Internal control over financial reporting and identification of control deficiencies. Internal controls will be put to the test in the coming year. When control deficiencies are identified, it’s important to probe beyond management’s explanation for why they’re not a material weakness and provide a balanced evaluation of their severity and cause. Is the audit committee — with management — regularly taking a fresh look at the control environment? Have controls kept pace with a company’s operations, business model and changing risk profile, including cybersecurity risks? Does management talk the talk and walk the walk?
Setting the tone
Audit quality drives trust and transparency for all stakeholders, from customers and employees to shareholders. It is enhanced by a fully engaged audit committee that sets the tone and clear expectations for the external auditor and monitors auditor performance rigorously through frequent, high-quality communications and a robust performance assessment. (See the Center for Audit Quality’s
To set expectations for the external auditor in 2022, consider the lessons learned from 2021. Discuss with the auditor what aspects of the 2022 audit will be conducted remotely or differently. What worked well in 2021? What are the opportunities for improved efficiency in 2022? How does working remotely add complexity to the audit? How have the company’s financial reporting and related internal control risks changed? What are the auditor’s plans to keep the 2022 audit and the 2022 interim reviews on track?
Plan for frequent, candid communications between the auditor and the audit committee — beyond what’s required. The list of required communications is extensive and includes matters about the auditor’s independence, as well as matters related to the planning and results of the audit. Broadening the conversation beyond what’s required can enhance the audit committee’s oversight, particularly regarding the company’s culture, tone at the top and the quality of talent in the finance organization.
Audit committees should also probe an audit firm on its quality control systems to drive continual improvement in audit quality — including the use of new technologies. In discussions with the external auditor regarding the firm’s internal quality control system, consider the results of Public Company Accounting Oversight Board’s inspections and internal inspections and efforts to address deficiencies. Remember that audit quality is a team effort, requiring the commitment and engagement of everyone involved in the process: the auditor, audit committee and management.
Real transparency is not always easy and is often uncomfortable. But it drives audit quality and accountability, which are critical to building trust with customers, employees and investors.
For more on the issues that audit committees should keep in mind in the year ahead, read KPMG's “
