By Heather Ogan
The Board of Directors of an organization, public or private, has an important oversight function over management as they carry out their day-to-day functions for the benefit of the various stakeholders of the organization. Effective Board oversight is critical so that there is an extra layer of advice and approval (checks and balances) ensuring that management pursues those strategies that further the mission, vision and values of the organization and are in the best interests of the organization’s stakeholders and/or shareholders.
Since the advent of the Sarbanes Oxley Act in 2002, public company boards as well as corporate executives have been called upon to attest as to the veracity of the financial reports released by their organizations by personally certifying certain disclosures, and the Audit Committee of such companies have been required to include a finance “expert”. As senior finance executives, our partners at FLG are often called upon to bring our specialized knowledge, skills and expertise to bear as board advisors to help improve board understanding of industry-specific issues and risks. We help board members be more effective in their oversight capacity, thereby, delivering a higher quality service to their stakeholders.
While no two boards will ever be exactly alike, and the particular industry, circumstances, risks, financial reporting issues and current challenges facing each organization will differ, I believe there are six important considerations that define excellence in board oversight responsibilities as a CFO Board Advisor:
1.Setting a Strategic Roadmap and Charter for the Audit Committee
The CFO as a board advisor should take a leadership role in mapping out the key priorities of the Audit Committee as an organizational and governing body. The Audit Committee should have a well-defined charter that includes:
Audit Committee purpose and authority; this will enumerate the purpose of the committee and all the areas of oversight the committee will have, as well as the authority for appropriating and approving budget to support the audit work and any remediation required.
Committee composition and meeting schedule; this will specify the number of committee members as well as the educational background and professional expertise required of members to ensure that they are able to interpret and provide appropriate guidance as relates to any findings. This will also specify the frequency and method of Audit Committee meetings and other guidelines.
Responsibilities of committee members; this will specify the duties of the committee members, including responsibility for reviewing the Audit Committee Charter at least annually, and items 2 to 6 below.
2. Clearly Articulating the Scope and Composition of Enterprise Risk
This important oversight function of the Board encompasses how the organization defines and manages risk from an enterprise perspective, including (but not limited to) risks to the physical plant, supply chain, brand risk, reputation risk, and cyber risk. Some industries are also susceptible to other sector-specific risks. The CFO as a board advisor plays an important role creating the organization’s gameplan around enterprise risk management and reviewing this with the Board. This should include defining risk measurement/metrics, developing risk mitigation strategies, communication requirements and implementation of effective risk management policies and operational requirements across the enterprise.
3. Leadership: Modeling the Right Corporate Culture
Another important area for board oversight at any organization is “setting the right tone” at the leadership level. This is so important that I am often tempted to underscore it twice – first and last. Why? Because the impact of corporate culture on an organization’s risk profile cannot be overstated. When everyone in an organization thinks their leaders don’t care about integrity, they won’t care about integrity either. The CFO as a board advisor should work closely with the board to define the key values at the organization and then ensure that the values are communicated broadly and through multiple avenues across and within the organization.
4. Ensuring Audit Committee Oversight of External Auditors
While external auditors need to work closely with the management team, it is critical that these advisors be under the oversight of the Board Audit Committee so that they remain independent of management whose work they are auditing. Ideally, external auditors should help to identify any significant accounting policies that depart from standard industry practice and should provide the committee with a careful analysis of the risks and benefits of any available alternatives.
5. Ensuring the Independence of the Internal Audit Function
This is an important consideration because it goes to the effectiveness of the Internal Audit function. Smart C-Suites should always view Internal Audit as their test drivers for their most important processes and controls. They should use these teams to test their key processes and controls early and often, to identify and resolve any weaknesses or failures and ensure they are continuously improving their control environment. To ensure that the Internal Audit team can be most effective in providing the board with solid input and guidance, the CFO board advisor should always require that this function report directly to the Audit Committee so it can remain independent of management.
6. Oversight over Financial Reporting
Finally, it all comes down to the “bottom line” – the veracity of the organization’s financial reports. Boards must be able to quickly digest and understand what the numbers mean in terms of both current company performance, risk factors and future performance implications. The CFO board advisor must be the master of all financial reporting, including the systems, structure and frequency of reporting, level of detail and content display, and the key KPIs and metrics for the company being presented to the board and other stakeholders. CFO board advisors must also be knowledgeable about industry-specific regulatory requirements and industry standards that need to be considered and disclosed to the board. This is essential for credibility, but also is critical to building a strong relationship with the board, collectively and individually.
At FLG, we pride ourselves in the depth of our experience as strong, independent CFO board advisors. Whatever the business situation your board or company is facing, we’ve probably seen it and whatever the transaction, we’ve probably done it. You can trust us to deliver effective and candid board guidance, every time.