On critical accounting issues, CFOs can add value: as audit committees' responsibilities and pressures grow, they are now looking to the CFO to help them understand the complex area of oversight of accounting judgments and estimates.

• Author: Daly, Kenneth
• Position: Audit committees interest in integrity of company's financial reporting

If not the case already, CFOs may soon find their audit committee's interest in the company's critical accounting policies, judgments and estimates heightened significantly. With Sarbanes-Oxley Act Section 404 compliance processes widely in place, many audit committees are refocusing on the issues they view as critical to the integrity of the company's financial reporting process.

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Oversight of internal controls remains a top issue, as does risk management. But many audit committees have identified accounting judgments and estimates as their top priority, and they're looking to the CFO to help them better understand this increasingly complex area of oversight.

Accounting: Audit Committee's Top Priority

In a recent survey by KPMG's Audit Committee Institute (ACI), audit committee members identified oversight of critical accounting policies, judgments and estimates as their highest priority this year. In related survey findings, a majority of audit committee members also said:

* They were only somewhat or not satisfied that management provides them with the information they need to oversee critical accounting judgments and estimates (67 percent); and

* They need to spend more time discussing critical accounting judgments and estimates (80 percent).

In short: audit committees want to have a better understanding of the company's critical accounting issues; and they need--and expect--management to help them become better informed on this issue.

A High-Pressure Environment

CFOs can readily appreciate the challenging environment in which audit committees are working today. The dramatic increase in the number of restatements in recent years--414 filed in 2004, and nearly three times that number reported in 2005--points to the powerful combination of pressures that audit committees must grapple with: increasingly complex accounting standards, management's drive to "make its numbers" and demands by investors and regulators for integrity and transparency in financial statements.

In this environment, audit committees are developing a greater appreciation for the tentative and "fragile" nature of critical accounting judgments and estimates and their effect on the company's financial statements. They also must consider a number of regulatory requirements affecting their oversight of this issue.

Under Sarbanes-Oxley Section 204, the external auditor must review with the audit committee all critical accounting policies and practices...