Tool for Audit Committees: Questions on Non-GAAP Measures

Kerie Kerstetter

With an ever increasing list of duties, the audit committee has at times been compared to the kitchen junk drawer. That is, a catch-all for the mismatched items that are so important to everyday functioning.

In her keynote address at the 2015 AICPA National Conference, SEC chair Mary Jo White reiterated the full plate that today’s audit committees have before them, not to mention the gravity of these responsibilities:

I have growing concerns about the amount of work required of some audit committees. The increasing workload may dilute an audit committee’s ability to focus on its core responsibilities: selecting and overseeing the independent auditors; internal controls and auditing; setting up an appropriate system for the receipt and treatment of complaints about accounting; and reporting to shareholders.

– SEC Chair Mary Jo White

At the helm, the audit committee chair not only leads and oversees these core functions, but he/she is spending more time managing additional risks such as culture oversight and cyber risk. (Don’t miss our series: Who Should Own Cyber Risk?). According to veteran chair Douglas Maine, board member with BroadSoft and Orbital ATK, the audit committee chair can expect a time investment that is roughly 3-4 times that of a normal audit committee member.

With shareholders placing a greater demand on issues like audit committee communication and rotation, board members need to be keeping these responsibilities and necessary skill sets in mind as they recruit and mentor audit committee chair successors.

Inside America’s Boardrooms experts Douglas Maine and Cindy Fornelli, now former Executive Director of the Center for Audit Quality, weigh in on best practices for audit committee chair succession planning:

Q: What should the recruitment process look like for the audit committee chair?

The current audit committee chair should be involved in writing the specifications for the new board member. He or she should also be involved in the interview process. Collectively, boards must be thinking through the new skill sets required of today’s audit committee chairs, as the role has become increasingly investor-facing and molded by Sarbanes-Oxley’s “financial expert” guidelines.

“Boards must be looking at successors who are capable of asking the kind of penetrating questions that are required of the audit committee chair. Moreover, he or she must be able to discern whether they are receiving an adequate answer.”

– Douglas Maine, veteran audit chair

According to Cindy Fornelli, a robust onboarding process is the most critical stage of succession planning. Boards must give the new audit committee chair enough time and information so that he/she can understand the company, its risk profile, how the company makes money, etc.

Allowing adequate time, along with a robust mentoring process, is foundational to a sound succession plan. Boards must leverage their available resources (see resources below), which successors should be attending to alongside the current committee chair.

Q: How should the board approach audit committee chair rotation?

According to Maine, 5-7 years is a reasonable rotation period for audit committee chairs. Yet our experts had several caveats to share.

As rotation becomes more common across all board positions, Fornelli cautions board members against allowing these rotation requirements to replace a necessary self-evaluation process—one that should be conducted both board-wide and on the committee level.

Additionally, host TK Kerstetter advises boards to establish the chair rotation periods as a range (e.g., 5-8 years). This allows boards the flexibility to respond as conditions arise. For example, a successor may need more training or it may simply not be an ideal time to transition.

Watch the full episode on audit committee succession:

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Kerie Kerstetter
Kerie Kerstetter is a former Senior Director at Diligent and the Next Gen Board Leaders. She has done extensive work into how governance and ESG technologies empower leadership to make informed, data-driven decisions while mitigating cyber risk. Kerie was one of the founding members of Boardroom Resources, the premier educational resource for board members, acquired by Diligent in 2018.