The top accountant at the Securities and Exchange Commission provided a brief primer for audit committees on everything it takes to be effective in the job these days. Spoiler alert: there’s a lot more to it than regular meeting attendance.
Through its oversight of the financial reporting process, the audit committee is critical to producing credible financial statements, said Wesley Bricker, chief accountant at the SEC, in a recent speech. “The importance of the audit committee’s work cannot be overstated,” he said. "Fulfilling its oversight responsibilities places the audit committee at the center of the relationship between management of a public company and its independent auditor.” Investors rely on audit committees to establish and maintain appropriate tone, capacity, and competence, he said.
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To be truly effective in discharging its oversight duties, audit committees need a sound understanding of the business and the environment in which it operates, Bricker said. That leads to an understanding of competitive pressures and the risks to internal controls and financial reporting, he said, arising from things like rapid growth, new business models or products, and new geographic areas.
Audit committees also need to understand new accounting pronouncements, he said, as implementation may affect risks in preparing financial statements, “particularly if implementation planning or execution is lacking.” That’s largely believed to be the case around new requirements for revenue recognition, which take effect in 2018, where experts including Bricker have been wringing their hands for months over slow corporate movement to get ready for the rules.
Following closely after revenue recognition, major new requirements take effect in 2019 for measuring lease obligations and bringing the associated assets and liabilities on to corporate balance sheets. Implementation there has generally been slow as well, as companies are knee deep in revenue recognition adoption. New requirements for financial instruments and credit losses also are looming on the horizon.
Bricker had further advice for audit committees about assuring diversity on committees, pursuing continuing education or training, managing workloads, setting tone at the top, overseeing internal control over financial reporting, non-GAAP and other key operating metrics, overseeing exterinal auditors, and reporting on audit committee activity.