Audit Committee Insights | July 2021

Summer is here! Before you head to the beach, the mountains, the lake, or the pool, read on to find the latest financial reporting news and insights for audit committees. We welcome input; please let us know what you think.

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What’s Hot? Audit Committees Will Keep the Best of Being Virtual

Let’s face it. The pandemic ripped the band-aid off a lot of old practices and forced new ways of doing things. Do we miss getting together in person? Yes. But being virtual wasn’t all bad and audit committees are re-evaluating what practices to keep as pandemic restrictions ease.

What’s staying? Video conferencing. Not 100% of meetings, but some. Audit committee members at recent Tapestry Network (TN) virtual events stated:

• Virtual meetings work and are efficient.
• Virtual is now video (cameras on!), which is more effective than the old telephonic ways.
• Virtual audit committee meetings are being chopped into smaller slices.
• A broader range of participants can be included such as finance staff from around the globe.
• The success of virtual meetings is predicated on robust relationships which require time and in-person interaction to develop.
• Different topics lend themselves well to virtual meetings (routine, administrative) with more strategic matters better to discuss in person.

What’s on the audit committee’s agenda? According to TN participants:

• ESG
• Risk oversight
• Cybersecurity and data privacy
• Finance function talent
• Internal audit oversight
• Transactions and integration

Many agenda topics are with a lens of lessons learned from and consequences of the pandemic. Audit committees are reconsidering how technology is used in the finance and internal audit functions and re-evaluating risks and opportunities. Talent continues to be important with a focus on shortages in certain areas.

Role of the Audit Committee: How to Govern Culture

Understanding, assessing, and governing culture is often a board-level responsibility. EY’s Center for Board Management (CBM) offers four ways that boards can govern culture and enhance risk management:

1. Align corporate culture to strategy, and recognize when your culture should evolve
2. Consider how your culture is communicated and reinforced
3. Ask your management team to measure and monitor progress on culture
4. Carve out enough time to discuss culture at board level

What is the role of the audit committee related to culture? Culture impacts risk. Culture impacts the audit committee’s ability to execute its responsibilities. EY’s CBM provides questions members of the board may want to consider asking:

• Do we set the right tone at the top and give enough attention to culture at our board meetings as a key enabler of strategy?
• How thoroughly have we, as a full board or committee, discussed the impact of culture on risk, risk management and the internal control environment?
• How is the organization’s culture shifting to align with a change in strategy? Can the company achieve new things with old ways of working?
• Have we discussed metrics that could be gathered and monitored as a barometer for cultural fitness? Does management’s reporting need to be adjusted to capture better data for the board’s consideration related to culture matters?
• Does our board’s composition and dynamics support the company’s commitment to fostering an environment and culture of diversity and inclusion as well as its broader purpose?

Mitigating the Risk of Fraud: Practical Observations and Lessons Learned

What lessons were learned from a recent Anti-Fraud Collaboration study of SEC enforcement actions?

• While it is often the CEO or CFO who is charged in an enforcement matter, employees down the line often suspect—or perhaps participate in—improper activities but fail to speak up. Compliance programs should not only focus on the tone at the top but also that which permeates the entire organization. (See importance of culture above).
• Risk assessment procedures should be thoroughly reevaluated as circumstances change, such as during an economic downturn or when nearing an initial public offering. A recent report released by the Association of Certified Fraud Examiners and Grant Thornton found that 71% of respondents expect the level of fraud impacting their organizations to increase over time.
• The study highlighted that some of the problems revealed—insufficient internal controls, poor tone at the top, a weak culture, and lack of skepticism—are widely understood, and yet they continue to plague many organizations. As companies continue to address these perennial concerns, they should also be alert to new risks and disruptions that could potentially further complicate their fraud deterrence and detection efforts.

To learn more, go to www.antifraudcollaboration.org for the study and a summary report of a recent roundtable discussion.

ICYMI: CAQ Public Policy and Technical Alert (PPTA), June 2021

Each month, the PPTA highlights and examines the regulatory, standard-setting, legislative, and broader financial reporting developments impacting the public company audit profession.  The most recent PPTA included these featured articles:

• SEC announces removal of William D. Duhnke III from the PCAOB; Duane M. DesParte to serve as Acting Chair
  The SEC announced that it has removed William D. Duhnke III from the PCAOB and designated Duane M. DesParte to serve as Acting Chairperson. The PCAOB was established by the Sarbanes-Oxley Act of 2002 and oversees the audits of the financial statements of public companies and brokers and dealers through registration, standard setting, inspection, and disciplinary programs. Under the Act, the Commission selects members and the Chairperson of the Board.
• PCAOB Acting Chairperson announces reassessment of stakeholder engagement, advisory groups
  PCAOB Acting Chairperson Duane DesParte announced that he has directed staff to reassess the organization’s stakeholder engagement efforts, including revisiting for Board consideration the structure and membership of its advisory groups. Given this reassessment, the nominations process for membership in the recently-announced Standards Advisory Group has been paused.

Value of the Audit: A Brief History and the Path Forward
There are two key cornerstones of audit quality — the expertise and independence of the external public company auditor. There is a relevant tradeoff that is important to balance. The CAQ discusses the pitfalls of public policy proposals that seek to apply more stringent requirements on auditor independence to the potential detriment of needed expertise and audit quality in its new report, Value of the Audit: A Brief History and the Path Forward.

The report further explores the growing demand for company-reported information outside of the historical financial statements, and how the independent public company audit construct can be — and in some cases already is — applied to these other key areas of information.

Zoom fatigue. It’s a real thing and it hits women harder.

We can all agree the virtual world has its pros and cons. While working from home has some advantages, are you looking forward to getting back to the office? Meetings in person? Tired of Zoom? The Washington Post explains Zoom fatigue. Compared with in-person meetings, on Zoom we see ourselves. This can cause mirror anxiety and is one factor that contributes to Zoom fatigue according to a survey. We evaluate ourselves when looking in a mirror. There is a tendency for greater self-awareness among women. What else causes Zoom fatigue? Feeling physically trapped. For some, being on Zoom all day does not allow an opportunity to stretch or move around.

What can you do? It’s OK to turn off your camera or use the Speaker View setting to reduce mirror anxiety. Rethink your default meeting time and set to 25 or 50 minutes. Block your calendar to allow for periodic breaks in the day.

Questions and comments about Audit Committee Insights can be addressed to Vanessa Teitelbaum, Senior Director, Professional Practice (vteitelbaum@thecaq.org).