Risk Management Tops Audit Committee’s Stress List

In our second quarterly installment of the 2010 Bank Executive Research, Bank Director and Grant Thornton LLP partnered to survey audit committee members to find out what practices were most prevalent, how they rated their performance, and which issues kept them up at night. The following are highlights from the quarterly study results.

Audit Committee Effectiveness. While the vast majority of audit committee members feel their committee has sufficient technical expertise (87%), most also understand the importance of periodically testing the committee’s effectiveness. Nearly 70% of audit committee members say their committee performs an evaluation to determine the committee’s effectiveness in executing its charter, and even higher numbers of those from public institutions and those regulated by the Federal Reserve do so. Of those who perform such evaluations, the most common results included the committee altering or streamlining its agenda or increasing training for members.

What actions were taken following the audit committee evaluation?

Altered/streamlined agenda 52%

Increased training 43%

Enhanced reporting 38%

Changed policy on management/outside auditors attendance 34%

Replaced a chair/member 9%

Causes for Insomnia. The pressure on audit committee members never seems to let up, and the swirl of issues that surround their agenda are among the most problematic for any board committee. When we asked audit committee members and chairs about their biggest fears, the monstrous task of monitoring enterprise risk management rose to the top. But like any Hitchcockian thriller, the next highest-rated fear was the one they cannot see: unknown risks.

What is your biggest fear?

Monitoring enterprise risk management 31%

Unknown risk 25%

Regulatory scrutiny 16%

Undetected fraud 15%

Inaccurate financial reporting 13%

Who’s managing risk? The trend for banks and other companies to have a chief risk officer is picking up steam. Fully 63% of all respondents noted they have a chief risk officer on board and 71% of respondents from public companies do so. Compare this to just three years ago, when only 40% of public company audit chairs noted their bank had a chief risk officer. Moreover, 35% of audit committee members and chairs told us their institution had a risk committee that is separate from the audit committee. These trends are all logical, given that 82% of respondents believe the recent credit crisis increased their risk as audit committee members.

Percentage of institutions that have a risk committee separate from the audit committee.

Smaller institutions 17%

Larger institutions 41%

Public 37%

Private 18%

All institutions 35%

How to improve. Many audit committee members and chairs are eager to continue to improve their effectiveness and performance. When we asked which means would help them do so, 54% said they would like additional training opportunities. Forty-four percent of those who are looking to improve their performance want to receive feedback from audit partners about management and how they are doing in comparison to other management teams.

What could help you improve as an audit committee member?

Increased training 54%

More feedback 44%

More audit partner contact 17%

More timely information 16%

Policy check up. We also surveyed which policies were most prevalent
at audit committee members’ institutions. By far, nearly every respondent said they had a conflict-of-interest policy and a policy to conduct executive sessions. Other policies in place were whistle-blower policies, records retention policies, and though not as common, a policy to maintain separate legal counsel.

Which policies does your institution have in place?

Conflict of interest 93%

Executive session 93%

Whistle-blower 89%

Records retention 73%

Separate legal counsel 30%

Measuring moxie. Finally, we posed a question that admittedly takes moxie to answer. How confident are you in your audit committee’s ability to stand up and challenge management when necessary, without creating conflict? There is perhaps no greater test of an audit committee’s effectiveness than the ability to remain independent and maintain integrity of purpose. Still, doing so without creating strife is critical. On a positive note, most audit committee members we surveyed feel they have a good handle on this duty and are confident they could do the right thing, when called upon.

Are you confident your audit committee could stand up to management without creating conflict?

Very confident 90%

Somewhat confident 9%

Not confident 1%

For full survey results and further analysis visit www.bankdirector.com or www.grantthornton.com.

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