Duty of care, loyalty and good faith are the basic foundations for every board member as they strive to increase revenue and shareholder value for their institutions. As the regulatory requirements continue to expand, the role of the audit committee is quickly following suit, leaving many bank audit committee members concerned about their effectiveness.
At Bank Director’s Bank Audit Committee conference in Chicago on June 14-15th, Robert Fleetwood, partner for Chicago-based law firm Barack Ferrazzanno’s financial institutions group and Todd Sprang, partner at the certified public accounting firm Clifton Gunderson, took a crowded room of audit committee members back to basics during their Audit Committee 101 session.
Cautioning that these are not one-size-fits-all requirements, Fleetwood and Sprang outlined a list of fundamentals and best practices for today’s audit committee members.
1. Understand your duties. Sprang suggested if you are unsure of your role or responsibilities, seek a tutorial from outside counsel to ensure that every member is comfortable with their duties.
2. Recognize the reputational risk to the organization and you as an individual. At the end of the day, you want to do the right thing by all parties. It’s never a good situation when a director has to admit that he/she didn’t read the materials or didn’t know what was going on at their institution.
3. Oversight. The primary role of the audit committee is to evaluate the audit process, oversee financial reporting, and assess the risk and control environment. To do this effectively, committee members should be asking lots of questions, requesting feedback and regularly discussing concerns.
4. Committee composition. Most boards typically look to local CPAs to fill their audit committee seats, yet having members with a wide range of expertise provides additional perspective and beneficial feedback.
5. Yes, you need a committee charter. Not only should the charter be reviewed on a regular basis to ensure that the board is complying, but it happens to be a great tool for setting agendas.
6. To rotate or not to rotate? Fleetwood recommended that if you do implement a rotation requirement, that it take place after an extended period of time. The audit committee has a steep learning curve and rotating frequently creates the risk of losing members before they had a chance to peak.
7. Build a relationship with the external auditors. Communication is the key. Review your reports and materials ahead of time, and use the review session to ask them questions, get their perspectives on market trends, and request recommendations.
8. Internal audit reviews. Whether your institution uses in-house resources or outsources this process, a major red flag is a report with no findings. Ask why. You should always be finding ways to improve, rather than just going through the motions.
9. Setting the agenda. The agenda should follow the committee charter as well as include an annual checklist to work through regularly. Delegate the legwork to your experts and include them on the agenda periodically.
10. Attend the meetings. Distribute materials ahead of time, whether in print or through board portals, and include only what is necessary to review. Read the materials beforehand and attend in person at least quarterly.