December 1, 2022

Audit Committees: Avoiding the “Kitchen Sink” Phenomenon

Yesterday, the Center for Audit Quality released a new 34-page report in connection with researchers at the University of Tennessee Knoxville’s Neel Corporate Governance Center and the Pamplin College of Business at Virginia Tech. The title captures the audit committee’s eternal plight of being the dumping ground for new responsibilities: “Audit Committee: The Kitchen Sink of the Board.”

The report first notes the perils of the “kitchen sink” approach:

– Perpetually assigning emerging risks to the AC (i.e., the “kitchen sink” approach) can lead to suboptimal oversight due to overworked ACs and a “check the box” mentality.

– Traditional AC skill sets relate to financial reporting and internal controls. As AC responsibilities evolve, it is important that AC skill
sets evolve as well.

– Some AC members individually advocate for the AC to oversee these emerging risks because of their personal skills and interests. In these cases, AC members should be careful not to succumb to overconfidence bias and ensure that a clear succession plan is in place without them.

– To effectively allocate oversight responsibilities, ACs may need to consider situations when it makes sense to push back on their boards.

And it offers these tips to help audit committees balance the heavy workload:

– Develop skill sets that match oversight responsibilities

⸰ Actively assess the committee’s key risks when planning for continuing education opportunities and use specialists where needed.

⸰ Regularly evaluate whether AC refreshment is needed to keep up with the necessary skill sets to properly oversee evolving risks.

⸰ Carefully manage the AC agenda by mapping out risks to allow for deep dives on a rotation of topics throughout the year.

– Free up time for additional responsibilities by managing the agenda & relationships

⸰ Work with management to fine-tune the types of materials delivered in advance and hold AC members accountable for reading them.

⸰ Reflect on whether meetings allowed for sufficient time to evaluate management’s response to key risks, and schedule meetings so that they can go long or continue at an additional time when needed.

⸰ Maintain a collaborative relationship with management to foster transparency.

⸰ Adopt leading practices to manage shared governance across board committees.

This is all pretty common-sense stuff, but it’s helpful to see it gathered in one place. The recommendations are based on interviews with audit committee chairs, investors, and people involved with proxy disclosures – 2200 minutes of conversation!

Liz Dunshee