An audit provides assurance to those relying on the information presented in a company’s financial statements, allowing them to make more informed decisions. Audit committees play an integral role in helping to verify the information within financial statements tell a company’s story in a way that’s meaningful to the statement’s users—including management, owners, and lenders.
Audit committees do this by verifying the completeness of the information included, encouraging expanded disclosures of areas of interest to users, and setting the overall tone for factual and transparent financial reporting.
Here are four key agenda items for driving meaningful discussions and impactful results.
Required Auditor Communications
Recognizing the importance of effective two-way communication in a financial statement audit, the auditor’s professional standards include requirements for specific matters to be communicated with those charged with governance.
These communications present an opportunity for an audit committee to engage the external auditor in discussions about:
- Operational and strategic challenges the company faces
- The impact those challenges could have on the company’s financial reporting
- How other companies treat similar issues
Communication with the external auditor should include the following items:
Beginning of Audit
- Planned focus areas, scope, and timing of the audit
- Responsibilities of the auditor, management, and those charged with governance
- Audit committee’s views about fraud risk and whether there is any actual, suspected, or alleged fraud affecting the company
End of Audit
- Significant accounting practices, policies, accounting estimates, and financial statement disclosures
- Material corrected and uncorrected misstatements
- Material weaknesses or significant deficiencies in the internal control environment identified during the audit
- Significant difficulties encountered during the audit
- Disagreements with management
This isn’t an all-inclusive list, and the form and content of the communication will be tailored based on the company’s specific circumstances. Many audit committees view the findings around the internal control environment to be the most impactful because those findings often provide insight into future challenges the company may face.
Financial Reporting Oversight
The audit committee’s financial reporting oversight is a year-round responsibility, and committee members handle the following tasks:
- Oversee the financial reporting and disclosure process
- Monitor the choice of accounting policies as well as the adoption of new accounting standards and changes to existing standards
- Oversee the hiring, performance, and independence of the external auditor, and, if applicable, the performance of the internal audit function
- Supervise the regulatory compliance, ethics, and whistleblower hotlines
- Monitor the internal control process
- Discuss the adequacy of management’s risk-management approach and policies
While the audit committee completes its oversight of the financial reporting and disclosure process, committee members will want to ask the following questions:
- Given the current environment, do the financial statements share pertinent information that users need to make effective decisions? Are the disclosures complete and transparent?
- Do the financial statements adequately disclose significant unusual transactions affecting the periods being reported? Is the full story being told in an unbiased manner?
Ultimately, an audit committee—comprised of a blend of management and directors—has a responsibility to verify the company’s story is being told accurately through numbers. In doing so, they should consider discussions they’ve had while running the company at an operational level or a strategic board level.
Preparing for New Accounting Standards
Companies can benefit from proactively determining the impact of new accounting standards, such as the latest revenue recognition and lease accounting standards.
The new revenue recognition standard will, in most cases, exponentially increase financial statement disclosures and, in some cases, impact the amount and timing of revenue recognized.
Audit committees that actively review management’s project plan can help verify that management is prepared to accurately adopt the new revenue standard in a timely manner. This discussion should include anticipated challenges and resources available to assist with adoption, including engaging an accounting or consulting firm to assist with evaluation and implementation.
The new lease accounting standard, which requires all leases greater than a year in duration to be recognized on a company’s balance sheet, has the potential to impact a company’s compliance with debt covenants, among other items.
An audit committee will want to consider the impact to the organization, including the effect on key financial metrics and agreements. The committee can also benefit from working with its lenders and other financial statement users to proactively modify the arrangements or, at a minimum, provide notice of the potential impact.
Along with the changes to the balance sheet, the new lease accounting standard will add additional disclosures. An audit committee that understands the anticipated impacts of new accounting standards will be better prepared to hold management accountable for addressing the steps needed to timely and accurately adopt the standards. These steps may include the following:
- Identifying the dollar impact to the financial statements
- Defining what the new and expanded disclosures will look like
- Determining whether the company’s current IT systems and environment are capable of providing the required information
While completing these tasks, management may find that changes need to be made to the existing systems and processes to facilitate an accurate financial-reporting process in compliance with the new accounting standards.
Most companies understand the importance of anticipating—and strategically planning for—industry disruption to remain competitive in the global economy.
An audit committee is in a unique position to play a key role in this strategic planning process, which can help guide a company’s future. Because an audit committee often has a strong understanding of the company’s vision and available financial data, it can help identify metrics used to measure the company’s success.
As an audit committee looks to the future, it also needs to evaluate the finance function’s succession plan in terms of both individuals and IT systems. This evaluation should consider whether a company’s existing personnel resources have the skill and will to continue to drive the company forward.
Agribusiness is one of the most innovative industries, with companies continuing to produce more with fewer resources due to increased regulations. In the current environment, it’s imperative for businesses to have an audit committee that’s able to share the company’s story and anticipate future challenges.
We’re Here to Help
For more information or if you’d like help preparing for your organization’s next audit, contact your Moss Adams professional.