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Committees : Audit

What audit committees need to know

May 6th, 2011 |

Robert Fleetwood, a partner in Chicago-based law firm Barack Ferrazzano who specializes in financial institutions, will be speaking at Bank Director’s Bank Audit Committee conference June 14-15 in Chicago.  Here, he discusses the increasing importance of audit committees understanding capital issues, the advent of risk committees, and the one thing all audit committee members should do.

What is the most important thing that audit committees should be focusing on in today’s environment?

I am always hesitant to say that there is one “most important” issue or factor on which audit committees should be focused. Proper governance and adhering to practical, sound procedures are always critical, and should never be dismissed or overlooked.

audit-mtg.jpgFrom an issue standpoint, it is critical that audit committees, as well as the entire board, understand the ever-increasing importance of capital in the industry’s current environment. The audit committee must understand the organization’s capital structure, the risks inherent within that structure, and the possible effects of Dodd-Frank, Basel III and the overall regulatory environment. As the past few years have illustrated, capital is key. An organization must have a clear plan regarding how to maximize its capital resources now, and how to keep its options open for the future. The audit committee can play a key and important role in that overall process.

How have the responsibilities for audit committees changed during the last few years?

One change that I have witnessed over the past few years is the audit committee’s evolving role in overall risk management. A few years ago, it was common to have the audit committee oversee the organization’s board-level risk management. As audit committees became more and more overwhelmed, enterprise risk management systems have developed and risk committees have become more common.

Recently, it has become more common that overall risk management is not centered with the audit committee, particularly at larger organizations, but instead with a risk committee or the board generally. This is filtering down to smaller organizations, but in my experience smaller companies still are more likely to have the audit committee involved in overall risk management practices. I expect that this trend will continue to evolve over the next few years.

Name a best practice that you would like to see more audit committees adopt.

There are actually a number of best practices that many audit committees do not adopt or implement, often for very good reasons. We stress that there is not a “one size fits all” when it comes to governance. Just because one of your peers implements something, does not mean that you have to adopt it, particularly if it doesn’t make sense within your organization.

One practice that is applicable to all companies, all boards and all committees, however, is the importance of having directors actively participate, ask questions and engage in meaningful dialogue with management, the company’s advisors and other directors. We often hear of situations in which directors have not asked any questions, or did not engage in any meaningful discussions, regarding important decisions affecting the company. Not only does this potentially hinder the decision-making process, but it may not allow the directors to adequately establish that they satisfied their fiduciary duties in the decision-making process. The lack of participation, or the lack of proper documentation of participation through meeting notes and other mechanisms, opens the organization, as well as the directors, to potential liability if the action ultimately has a negative impact on stakeholders.  

rfleetwood

Rob Fleetwood is part of Barack Ferrazzano’s financial institutions group and heads the group's securities law practice area. Recently, he has been counseling clients through issues arising from the economic environment, and navigating clients through various government programs for the financial sector.

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