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Boards Improve Audit Committees But Few Evaluate Performance

The Financial Executive Research Foundation, FERF, the research affiliate of Financial Executives International (FEI), in cooperation with The Board Institute, has announced the results of a survey of FEI members that examines current audit committee practices at both public and private organizations. Two of the most notable findings are

– 96% of the public companies believe their audit committees are effective but one-third of these do not evaluate committee performance.
– About two-thirds of private organizations believe their audit committees are effective yet only 14% currently evaluate committee performance.
Based on respondent comments, board evaluations currently consist of a survey of board members themselves. A few organizations use a corporate governance committee or other source to provide a more independent assessment of audit committee performance.
Another finding from the survey is that public companies are substantially ahead of private firms in governance best practices.

“In 30 years of creating organizational measurement, this is one of the few times where public organizations have an innovative lead over private companies,” says Mark R. Edwards, chief metrics and behavioral research advisor of The Board Institute. “Because public companies are subject to Sarbanes-Oxley and shareholders are demanding adherence to the law, public organizations show a faster adoption of corporate governance.”

Organizations are making substantial investments to improve the audit committee process: nearly half of public firms invested over $400,000 in corporate governance compliance last year, and 8 companies invested over $1,000,000.
A major challenge seems to be that only two-thirds audit committee members in public companies are fully informed of their responsibilities. Another finding reveals that only one-third of the private firms responding have chosen to apply the new regulations.

These data show that, as organizations work to enhance audit committee performance measures, they are making substantial investments in time, education and money targeted to improving the audit committee process.

OCC Withdraws CRA Proposal

The Office of the Comptroller of the Currency (OCC) has withdrawn its proposed amendments to its Community Reinvestment Act (CRA) regulations. The OCC, together with the other federal banking regulators, proposed in February to raise the asset threshold for banks that are treated as “small banks” from $250 million to $500 million and to specify types of abusive lending practices that would adversely affect a bank’s CRA evaluation. The OCC has been carefully reviewing these and other CRA-related issues since the agencies initiated a formal review of the CRA regulations in late 2001.

According to a statement by the agency, “The OCC is very sensitive to the impact and potential burden on small-banks-from the CRA and other regulations…and to the fact that many community organizations and others believe strongly that an increase in the small bank asset threshold would have a very significant, and detrimental, impact on CRA activities nationwide.”

Poor Controls Over Self-Reporting

Business relationships with third-party suppliers, business partners, or vendor relationships that are based on the concept of “self-reporting” lose millions of dollars each year because of insufficient controls over such business models, says a new report by KPMG LLP, the audit, tax and advisory firm.

The Self-Reporting Economy: A Matter of Transparency and Trust outlines how corporate risk has grown unnecessarily in a burgeoning $300 billion “self-reporting” economy in which each business partner provides the other with pertinent financial and other information used to measure activity, such as sales-volume figures.

“Misreporting financial or other information in these relationships is usually not deliberate, but often the result of management’s wrongly interpreting complex agreements, unclear lines of responsibility, computer system weaknesses, or just plain clerical errors, causing certain aspects of the reporting between the companies to be inaccurate,” said Robert S. Pink, a partner with KPMG’s Risk Advisory Services practice.

Companies that have effective corporate-governance safeguards, however, can protect against self-reporting risks by business partners, according to the KPMG report. Some measures companies may consider are:

Conduct a comprehensive review of a prospective partner’s internal controls before entering into a self-reporting relationship;
Determine if there are sufficient two-way communication and ongoing reporting mechanisms and controls to help ensure effective contract management and compliance;
Involve all parts of the company in managing the performance of self-reporting relationships.