As new risks multiply, the audit committee has become the “kitchen junk drawer” for many corporate boards.
The workload of the powerful committees has expanded sharply beyond their core role of overseeing a company’s financial reporting. They are grappling with new regulations, whistleblower claims and issues like cybersecurity and foreign corruption. In addition, the Securities and Exchange Commission is expected to suggest new rules by the end of next month requiring them to disclose more about their activities.
“It’s not the favorite committee,’’ says Fredric Reynolds, a retired CBS Corp. chief financial officer and audit committee chairman at Mondelez International Inc. To attract committee members, he sometimes promises relatively short stints: “You’ll be released for time served and good behavior,’’ he tells directors.
Mr. Reynolds estimates he spends 100-plus hours a year on Mondelez’s audit committee. One key part of that is the audit committees’ oversight of whistleblower complaints, which is required by the 2002 Sarbanes-Oxley Act. The vast majority are from people frustrated with their work colleagues, he adds. But when there’s smoke, “you don’t know if it’s fire.”
The speed and complexity of business and risk oversight “are stretching and straining many audit committee agendas,” according to a global survey of audit committee members released last week by accounting firm KPMG. Three-quarters of the 1,500 respondents said the amount of time required to carry out their responsibilities has increased at least “moderately” over the past two years.
Serving on an audit committee “has taken more time than I expected,’’ says a former tech-industry finance chief who sits on the board of a fast-growing community bank.
In August, he became interim chief executive of a closely held aerospace company, and says he warned the bank he didn’t have enough time for both roles. But, he says, the bank’s chairman told him, “We want you to stay involved in the audit committee.” He concedes that he has since skipped two board meetings.
Some boards appear to view the audit committee as a place to hand off any internal oversight issues, even if they are outside the committee’s traditional purview.
“Sometimes the audit committee is viewed as the kitchen junk drawer,’’ says Cindy Fornelli, executive director of the Center for Audit Quality, an accounting-industry group. Boards feel “if we don’t know what to do with it, we’ll give it to the audit committee.”
Some directors remain unfazed by the heavy workload because they enjoy being where the action is. “It’s where you have a very broad access to management time and information about the business,” says James Quigley, audit committee chairman for Wells Fargo & Co.
For some, however, the increased demands are taking a toll. E. Follin Smith resigned as audit committee chairman and a director of Discover Financial Services last spring because of the intense demands, according to people familiar with the situation. The retired CFO of Constellation Energy Group already was Ryder System Inc. ’s lead director, as well as an audit panel member there and at Kraft Foods Group Inc.
Ms. Smith told Discover Financial directors that she had more board work than she wanted, recalls one person with knowledge of the matter. “She had a lot on her plate.’’
Ms. Smith didn’t respond to phone calls seeking comment.
Government investigations can boost an audit committee’s work.Wal-Mart Stores Inc. ’s audit committee held an additional 13 meetings during fiscal 2014, because of probes into allegations that the big retailer had bribed officials in Mexico and other countries, according to its proxy. Wal-Mart has said it is cooperating with U.S. and Mexican government investigations in the matter.
Christopher Williams, head of Wal-Mart’s audit committee, couldn’t be reached.
Sarbanes-Oxley contributed to the more expansive view of the audit committee’s role. In addition to requiring such committees to establish procedures to handle whistleblower complaints, the law made it clear the audit committee hires the outside auditor, and that it must be made up entirely of independent directors.
“From the perspective of the board, the audit committee looks like the entity that has the most expertise on anything related to risk,” says Daniel Goelzer, a Baker & McKenzie lawyer and former interim chairman of the Public Company Accounting Oversight Board, the government’s audit regulator.
The SEC plans to issue a “concept release” by the end of March on what audit committees should tell investors—a step toward revamping disclosure requirements for the first time since 1999.
Accounting and corporate-governance groups have urged audit committees to voluntarily disclose more to shareholders, but the SEC thinks the voluntary disclosures lack uniformity. Only 13% of companies in the S&P 500 disclosed to investors their audit commitees’ specific considerations in approving their auditor, such as qualifications and geographic reach, according to a recent analysis by the Center for Audit Quality and consulting firm Audit Analytics.
As audit committees face the possibility of more work, even the most dedicated director has limits. Mr. Reynolds, the Mondelez audit committee chairman, also serves on Hess Corp. ’s audit committee. He was chairman of AOL Inc. ’s audit panel until stepping down in 2013 because he also was lead independent director.
“It was a little too much,” Mr. Reynolds recalls.