03 Jan. 2019 | Comments (0)
(This post is part of The Conference Board Governance Center series on the job description of a corporate director from the perspective of various stakeholders. Quotes from this Q&A is highlighted in Just What Is the Corporate Director’s Job? Independent Auditors’ and Regulators’ Perspectives on the Board Member’s Job Description.)
Sharad Jain is a partner in PwC’s Governance Insights Center. With more than 35 years of experience at PwC providing audit and audit-related services to large global companies, he has worked with many boards of directors to advise on a variety of complex matters. He has specialized in working with automotive, consumer products and industrial products companies, along with their captive finance and insurance businesses.
Jain has contributed to several PwC white papers on accounting and reporting topics of interest to consumer and industrial products companies. Going forward, Sharad will be the Governance Insights Center’s lead content expert on the Audit Committee Excellence Series.
He is a Certified Public Accountant (Elijah Watt Sells Award) and trained as a Chartered Accountant in the UK before moving to the USA with PwC.
He recently spent some time talking with Gary Larkin, the author of The Conference Board report, about the job description of a corporate director from the point of view of an independent auditor. Here are his thoughts.
What role does the external auditor play in the job of a corporate director?
It is important to note that the external auditor has a direct reporting line to the audit committee. In fact, SEC rules require the audit committee to be directly responsible for appointing, compensating, retaining and overseeing the work of the external auditors.
The fundamental responsibility of the audit committee is to oversee the integrity of the company’s financial statements. And, doing so has become more challenging today. There is increasing complexity, new and lengthy technical rules and higher expectations from shareholders, regulators, the public and other stakeholders. External auditors play a key role in helping the audit committee discharge its core responsibility. They provide an independent assessment by expressing an opinion on whether the company’s financial statements are free of material misstatements.
Audit committees should strive to maximize the value of the external auditors by building a strong working relationship and gaining deeper insights into the company on a variety of topics. For example, audit committees can ask the external auditor about feedback on the quality of management and corporate culture, business and industry risks, and audit committee leading practices.
How do you define tone at the top? Who owns that, the board or management?
We have been talking about the importance of tone at the top for a long time. With the many headlines over the past couple of years, this topic has become center stage as it has increased even more in importance. It is a topic we are discussing at all our board and committee meetings.
Tone at the top can be defined as creating an ethical culture where all employees feel responsible for doing the right thing. In addition, tone at the top and corporate culture should embody and promote the company’s values. Corporate leaders set the tone at the top and the board oversees and reinforces it.
The real challenge in this area is to determine whether the tone at the top permeates the entire company, not only at the top but in the middle and deeper throughout the organization.
How does a board guarantee it is getting sufficient information about its company? What kind of balance should there be between what they receive from management and external sources?
The board’s role is to represent shareholders’ interests as it oversees the company’s long-term strategy, key risks, CEO performance, and other areas.
Management is the primary source of information for the board. But the board should set the tone and expectations about the information it needs to carry out its responsibilities. With more boards moving to electronic board portals, they need to ensure materials are at the right level of detail and highlight the most challenging areas and greatest risk.
Although board members should have a positive, trusting relationship with management, they should bring an independent and skeptical mindset when performing their role. They will want to corroborate the information they are getting from management with other members of the management team and external sources to gain additional assurance, as needed. The balance is dependent on the topic, information provided, questions raised, interactions with management, and other items. Ultimately, if a director feels management hasn’t provided adequate responses to their questions, this should raise a red flag that the board may need to do more.
The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.