Factor tone and culture into the equation: good audit committees are 'a pain in the neck'--for financial reporting integrity, make sure yours is one, too.

• Author: Scheck, Howard
• Position: ON THE GOVERNANCE AGENDA

WITH THE SEC's stepped-up enforcement regarding corporate accounting and financial reporting, many audit committees are sharpening their focus on the quality of the company's financial reporting and disclosures. Essential to this, of course, is having robust discussions with management and auditors about the numbers and the narrative--critical accounting policies, judgments, and estimates, disclosures (including non-GAAP information), internal controls, key transactions, particular areas of SEC staff focus, and more.

But getting the numbers right also hinges on getting the tone and culture right. How does management get things done? What is the tone in the finance organization? As I saw during my time at the SEC, when significant problems with a company's financial statements cropped up, there also tended to be problems with the tone and culture, particularly a reluctance to ask the "why" questions.

In this stepped-up enforcement environment, audit committees--even those who are "on Lop of the company's numbers" --can continue to step up their own game by focusing on the softer elements of financial reporting integrity (and good regulatory compliance generally):

* Constantly assess the tone and culture. How does management get things done? Is there a strong culture of transparency and open communication? Are robust discussions of pros and cons encouraged, and dissenting voices heard? Are people rewarded for raising red (or even yellow) flags? Is there a commitment to financial reporting integrity throughout the organization? Exposure to middle management and other employees can help the audit committee get a good sense of the tone and culture driving not only financial reporting but compliance activities generally.

* Do the CFO and finance team have what they need? Financial reporting quality starts with the CFO and finance team. Make sure they have the resources (budget and talent) to do their job well. Long hours and lean teams can detract from financial reporting quality, as can pressure on management for quarterly results. A critical role...