Audit Committee: The Top Three Things Never to Forget

June 21st, 2012

reminder.jpgFor community banks, these are interesting times. The economic recovery hasn’t gained enough steam for institutions to be able to count on solid returns. Many banks also face a lingering credit crunch as access to capital remains restricted nearly four years after the Troubled Asset Relief Program. In fact, more than 350 institutions, many of them community banks, still have TARP and many of them are having trouble raising the capital needed to repay government funds. To top it all off, the coming implementation of the Dodd-Frank Act has created uncertainty—although community banks were exempted from some of the law’s more stringent requirements, there are still concerns that even smaller institutions will eventually be held to the same standard.

Against this backdrop, the work of audit committees has taken on added importance. With a slim margin of error and a shifting regulatory landscape, verifying that the proper internal controls and compliance measures are in place can be the difference between thriving, barely surviving, and falling behind the competition. Here are the top three issues that audit committees of community banks need to have on their radar for the coming year.

1. Don’t Neglect Audit Fundamentals

Audit committee members should approach their annual audit not as a routine exercise but as an opportunity to reassert their independence, neutrality and objectivity. Although audit committee members are well acquainted with their institution’s strengths and weaknesses, they should force themselves to adopt an impartial perspective when assessing external audit findings.

With this in mind, audit committee members should make sure the external auditor is asking the right questions and verify that the audit is being conducted with a healthy dose of skepticism. By dispensing with preconceptions about their institution, committee members can remain open to all answers, explore all possibilities—and more important—be prepared to take the actions necessary to address any issues the external audit uncovers. Furthermore, members can help promote a culture of strong internal controls by demonstrating their commitment to a thorough audit.

2. Try to Anticipate What Comes Next

As regulations and requirements continue to evolve, audit committees needn’t wait for the Federal Reserve or other agencies to release guidance to get a sense of the potential impact on their institution. Fortunately, seeing the future doesn’t have to involve a trip to a psychic for a tarot card reading. The following sources can provide important hints of what to expect.

  • The Center for Audit Quality, based in Washington, D.C., regularly publishes insight and the latest developments. Its board includes leaders from public auditing firms and it is affiliated with the American Institute of Certified Public Accountants.
  • The Public Company Accounting Oversight Board (PCAOB) was established by Congress to oversee the audits of public companies and seeks to promote informative, accurate and independent audit reports.
  • The Securities and Exchange Commission (SEC) has a list of proposed rules on its website that offer evidence on currents trends and areas that the agency is exploring.
  • The business press, both in its coverage and the mix of stories, can be a barometer of where policymakers and enforcement agencies are directing their focus.

3. Be Forthright in Communicating About Negative Audits

Community banks, by the very nature of their close relationship with customers and local businesses, must take special care in explaining audit findings. In the event of a negative or potentially damaging audit, audit committees can play an instrumental role in developing a communications strategy, particularly since an audit can uncover complex or arcane issues that may be difficult for other bank executives or the public to understand.

Across all communications channels—from press releases and investor relations calls to Securities and Exchange Commission filings—committee members should work to be sure that the information is consistent. Moreover, an institution should strive to demonstrate that it embraces accountability and transparency. The tone and messaging can help send a powerful signal that the bank has nothing to hide and is taking the necessary steps to address issues. Information on performance that goes beyond the financial statements is important to maintaining confidence in your institution. For example, non-GAAP key performance indicators such as customer retention and assets under management can offer context and help allay any fears among the public.

By remaining objective, proactive and transparent, the audit committees of community banks can help their institutions stay nimble in the face of changing conditions while instilling confidence in local customers.


Bill Knibloe is the partner in charge of the financial institutions audit practice with Crowe Horwath LLP. You can connect with Bill Knibloe by viewing his profile on LinkedIn.