The audit committee’s contribution to strategy | KPMG | CA

The audit committee’s contribution to strategy

The audit committee’s contribution to strategy

Is there a larger role to play in overseeing strategic alignment?

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The audit committee’s contribution to strategy

Over the last decade, the audit committee’s focus has been largely on compliance, governance and a variety of approval issues. For the most part, however, today’s audit committees have established rigorous oversight frameworks that require less time to oversee. The question is, does this provide audit committees with an opportunity to focus on new areas? Given the audit committee’s expanding role in overseeing risk, are there any emerging areas where the audit committee can deliver enhanced oversight value?

In some cases—particularly in capital intensive industries where significant capital investment and related risk are common—audit committees are increasingly interested in financial performance. How is performance tracking with both risk appetite and corporate strategies in areas such as acquisitions, new product development and capital expenditures? Accordingly, some audit committees are becoming more interested in how corporate systems are capturing and measuring specific, relevant performance indicators, such as return on capital, production milestones, alignment with three/five-year plans, etc.

While the board of directors is responsible for overseeing strategy, the financial metrics used to measure performance are the responsibility of the finance function, encouraging audit committees to continually look for ways to develop, maintain and enhance communications with the CFO. Importantly, since the audit committee’s oversight role over the finance function typically creates a much deeper relationship with the CFO and his or her team, they tend to “speak the same language,” which facilitates the effective and productive exchange of strategically important performance and financial information.

Getting the right information

The strategic effectiveness of the audit committee depends to some degree on its ability to access and develop an understanding of the organization's KPIs (key performance indicators) and whether they align with and support overall strategic goals. Because of its recent focus on financial reporting oversight, the audit committee may not have been as engaged in this area as it might have otherwise.

The audit committee now, however, has an opportunity to enhance the "financial dialogue" between the board and management with respect to how management systems are measuring performance. This goal is also being given a boost by the increased willingness and effort audit committees are expending to bring in operational experts to help them better understand the business itself and which KPIs most effectively determine performance. 

Given these challenges-and with the considerable stakes surrounding financial risk-audit committees emerge as uniquely qualified to discuss certain matters, such as:

  • What are the quantified performance objectives we need to measure?
  • How can we monitor them going forward?
  • What controls are in place?
  • How robust are our systems and controls?
  • Can our systems even measure those KPIs?
  • Are we regularly reviewing KPIs to determine their relevance?
  • We prepare three/five-year plans-are we performing hindsight reviews of actual performance to the objectives set out 3 to 5 years ago?
  • Can we access the right combination of financial and operational expertise to holistically address strategic concerns?
  • Should external expertise be sought to broaden the conversation?
  • Should we seek the operational knowledge of board members who are not members of the audit committee?

Opening the right communication channels

Beyond getting the right information and acquiring appropriate expertise, maintaining strong lines of communication between the CEO, CFO and the audit committee is key to the latter’s strategic relevance. Indeed, the CFO and the audit committee depend heavily on one another. In most companies, the CFO’s primary source of interaction with the board of directors is through the audit committee, and the audit committee’s understanding and oversight of strategically-based financial decisions, such as acquisitions or capital expenditures, is often based on financial information and opinions provided by the CFO.

Moreover, with the audit committee also striving to balance the CEO’s strategic views with critical financial input from the CFO, the audit committee can essentially become the lynchpin connecting the CEO, CFO and board, ensuring they are defining risk in the same ways and are strategically aligned going forward. A well-integrated CEO–CFO team can ensure the CFO has the ability and capacity to work with the audit committee and—if a third-party opinion is required—an external auditor.

An enhanced role, not a new one

In today’s expanding risk environment, more and more ACs are getting involved in strategic oversight. As factors such as technology, social influences, competition, globalization and compliance up the pace of change and companies—under constant pressure to adapt—implement bolder and riskier strategies, the onus on companies to accurately track and measure performance becomes greater. Similarly, audit committees should consider looking carefully at whether performance, risk tolerance and strategic decision-making are effectively, consistently and sustainably aligned.

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