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16 MONDAY MAY 18, 2015 THISDAY CFO succession planning is still a major gap, and many audit committees want to dive deeper into finance issues. • What our 2015 KPMG Audit Committee Survey Tells Us Except for during a crisis, the issues on the audit committee’s radar don’t change dramatically from year to year (and they probably shouldn’t); but sometimes small shifts tell a big story. In our 2015 Global Audit Committee Survey, it comes as little surprise to see four key concerns carried from last year: economic and political uncertainty and volatility, regulation and impact of public policy initiatives, operational risk, and cybersecurity. Clearly, a slowing global economy, the flare-up of geopolitical hotspots, and the proliferation of major cyber breaches have intensified the spotlight on these issues. But for many audit committees today, these headline risks are also driving a slower moving – yet critically important – trend potentially impacting the audit committee’s effectiveness: agenda overload. Our survey sought the views of audit committee members on: • Top Challenges and Concerns • Risk and information Quality • Audit Committee Agenda and Workload • Oversight of Auditors • Audit Committee Effectiveness Audit committees, by and large, continue to express confidence in their oversight of the company’s financial reporting and audit quality. But the accelerating speed and complexity of business and risks are stretching and straining many audit committee agendas, which often include other major areas of risk – compliance, IT, cyber risk, and others. Of the 1,500 audit committee members who responded to our global survey, three out of four said the time required to carry out their responsibilities has increased significantly (24 percent or moderately 51 percent). Half said the job continues to grow more difficult given the committee’s time and expertise. In a positive development, more boards are reallocating risk oversight responsibilities among their committees and the full boardwhich bodes well for audit committees. A lighter “risk agenda” can translate into more time for quality discussions and a deeper understanding of the business – two factors that survey respondents said would most improve their audit committee’s effectiveness. Survey respondents also cite ongoing opportunities for improvement in a number of critical areas – from CFO succession planning and getting more insight from external auditors (e.g., on the strengths and weaknesses of the finance organization), to improving the quality of risk information and better leveraging internal audit as a vital resource for the audit committee. Of course, it is difficult to compare data from 35 countries – often with markedly different business environments, regulatory requirements, and corporate governance practices. But our 2015 survey findings offer insights that audit committees (as well as management teams, auditors, and others) can use to sharpen the committee’s focus, benchmark its responsibilities and practices, and strengthen its oversight going forward. A snapshot of responses CFO succession planning is still a major gap, and many audit committees want to dive deeper into finance issues. Assessment of CFO performance and interactions with the audit committee are generally viewed as effective; yet more than 40 percent of audit committee members say the committee is “not effective’ in the CFO succession planning (clearly a pressing issue given the rate of CFO turnover). Many audit committees would like to hear about various aspects of the finance organization’s work – financial risk management, capital allocation, tax, debt – in greater depth. Views on audit reforms are mixed; and while confidence in audit quality continues to be strong, there’s still room for auditors to offer more insight. Across the globe, audit committee views on whether the EU’s audit reforms (including mandatory rotation) will improve audit quality widely. The greatest areas for external auditors to improve their performance: offering insights and benchmarking on industryspecific issues; helping the audit committee stay up to speed; and sharing views on the quality of the financial management team. On internal audit, audit committees are still looking for greater value. Q1. Which of the following risks (aside from financial reporting risk) pose the greatest challenges for your company? 33% 30% 27% 26% 47% 21% 20% 4% 16% 7% 7% 9% 52% Other Task risk Uncertainty and volatility, regulation and compliance, and operational risk top the list of the challenges facing companies today. Many audit committees around the world point to economic and political uncertainty and volatility, regulation and compliance, and operational risk, and controls as posing the greatest challenges for their companies. Audit committees want to spend more time on risk oversight – particularly cybersecurity and the pace of technology change. Audit committees want to devote more – or significantly more – agenda time to overseeing the company’s risk management processes and operational risk and controls, as well as cyber security and the pace of technology change. The quality of information about cybersecurity and technology risk, talent, innovation, and business model disruption is falling short. Audit committee members rate much of the information they receive as generally good, yet many continue to express concern about the information they receive (at the committee or full board level) related to cyber risk and technology change, talent management, growth and innovation, and possible disruption to the business model. (The CIO ranks lowest in terms of quality interaction and communication with the audit committee.) Exposure to (and readiness for) critical infrastructure failures- financial systems, telecommunication networks, transportation, energy/power-may also require more attention. More boards are reallocating risk oversight duties as the audit committee’s workload becomes more difficult. Three quarter of audit members surveyed the time required to carry out their duties Q2. Are you satisfied that your audit committee has the time and expertise to oversee the major risks on its agenda in addition to carrying out its core oversight responsibilities? Possible disruption to the business model Growth and innovation (or lack of innovation) Talent Management and development Operational risk/ control environment Legal/ regulatory compliance Government regulation/ impact of public policy initiatives Uncertainty and volatility (economic, regulatory, political) 8 % No 40 % Yes, but increasingly difficult Supply chain risk Global systemic risk (pandemic, social unrest, geopolitical instability) 52 % Yes Cybersecurity - including data privacy and protection of intellectual property Pace of technology change (e.g., emerging technologies, mobile, social media) has increased moderately (51 percent) or significantly (24 percent); and half said that, given the audit committee’s agenda time and expertise, their role is becoming “increasingly difficult”. More than one-third of boards have recently reallocated risk oversight duties among the full board and its committees (up from 25 percent last year) or may consider doing so in the near future. So what are the key takeaways for organisations and Audit Committees? Audit Committee Agenda and Workload • Reassess whether the committee has the time and expertise to oversee other major risks • Be wary of “mission creep”, and consistently question whether new and ongoing issues belong on the audit committee’s agenda. Does cyber risk require more attention at the board level? • Take a hard look at the board’s risk oversight approach. Does the allocation of risk oversight activities make sense in light of how the risk and regulatory environment has changed recently? Is there a need for another committee, additional expertise, or better communication and coordination on risk oversight among committees? Oversight of Auditors • Stay apprised of various audit reform initiatives and take lead on ensuring audit quality • Set tone and clear expectations for the external auditor, and actively monitor auditor performance through frequent, quality communications (formal and informal) and a robust evaluation of the external auditor’s performance. • Internal audit should be a crucial voice on risk and control matters – from financial reporting and compliance issues to key operational and technology risks facing the business. Does internal audit have the stature – and a direct line to the audit committee – to ensure that its voice is heard and valued? • Leverage internal audit as a barometer of the company’s financial and operational health – helping the audit committee understand the quality of financial and operational KPMG CFO Forum Series For more information on this article, please contact: Tola Adeyemi tola.adeyemi@ng.kpmg.com Segun Sowande segun.sowande@ng.kpmg.com © 2015 KPMG Professional Services, a partnership registered in Nigeria, and a member of the KPMG network of independent member firms affliated with KPMG International Cooperative (“KPMG International”), a swiss entity. All rights reserved. KPMG CFO Forum, tackling issues and challenges CFOs face www.kpmg.com/ng www.linkedin.com/in/kpmgnigeria www.facebook.com/kpmg.nigeria Thought Leadership Round Tables Seminars www.twitter.com/KPMG_NG
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