Audit and risk governance: how does your board rank?

Author:Chertoff, Jeffrey

Leading proxy advisory firms, including Institutional Shareholders Services Inc. (ISS), publish corporate governance ratings and detailed reports on public company governance, including evaluations of a company's corporate governance risk profile related to audit and risk oversight. Have you ever wondered why some companies have poor ratings from ISS for their audit and risk oversight governance?

Corporate boards of directors today are challenged with their clear responsibilities to oversee the risk management of their companies, especially financially related risk. Board nomination committees are actively seeking experienced executives who are strategic thinkers, with practical experience in management and, most importantly, those who will qualify as financial experts.

Here are some of the risk issues that might potentially impact a company's rating as it relates to audit and risk oversight governance:

* How many financial experts serve on the audit committee? Financial experts should have experience as a CFO, CPA, or partner of an accounting firm; for more effective corporate governance, at least one or two financial experts should sit on the audit committee.

* Non-audit fees represent what percentage of total fees? Consider that an auditor's ability to remain independent and objective is questionable when fees paid to the auditor for non-audit services, such as management consulting and special situation audits, exceed the standard annual audit fees.

* Did the auditor issue an adverse opinion in the past year? An "adverse" auditor opinion is when the auditor believes that no part of a company's financial statements are presented correctly, contain material misstatements, and therefore, should not be relied upon.

* Has the company restated financials for any period within the past two years? Companies may restate their financials due to misrepresentation or accounting irregularities that may result in significant reputational, legal, and financial risks. Hundreds of companies have restated their financials in recent years, calling to question the reliability of the company's numbers in the future.

* Has the company made non-timely financial disclosure filings in the past two years? Late financial filings (10-Qs and 10-Ks) could be indicative of ineffective internal controls.

* Has a regulator taken enforcement action against the company, director or...

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