On the audit committee's agenda

By: Lloyd Ryan Moraño

AS a body with oversight of an organization's financial position, the audit committee plays a critical and complex role in good corporate governance. Particularly during this period of great volatility and dizzying technological advancements, the audit committee is expected to be a steadying and guiding hand to business leaders as they navigate risks and opportunities.

For 2024, Deloitte expects audit committees to continue focusing on what is perhaps the most important item within their purview: regulatory matters. As part of its responsibility to oversee financial reporting processes and internal controls, the audit committee has to stay abreast of the often numerous priorities of and new rules from regulatory bodies.

In the middle of last year, the International Sustainability Standards Board (ISSB) finally issued two long-awaited standards that represent initial steps towards a global "shared language" for disclosure requirements related to governance, strategy, risk management, and sustainability-related metrics and targets. IFRS S1 and IFRS S2 are designed to help report preparers better capture and communicate alignment with global ESG standards and enhance the usefulness of those reports for investors in making decisions.

Given the direct connection of disclosure requirements to financial reporting, the audit committee will play a big part in the efficacy of these new standards, which should be no surprise to its members. A Deloitte study in 2022 found that for S&P 500 companies that tap multiple board committees to oversee their ESG governance, an audit was included in that framework 52 percent of the time. Here in the Philippines, I'm sure audit committees are playing a critical role in outlining their organization's plans for complying with the Securities and Exchange Commission's Sustainability Reporting Guidelines for Publicly Listed Companies. But what of private enterprises?

As we move closer to an environment where ESG reporting is mandatory rather than nice-to-have, organizations will have to beef up their capabilities surrounding ESG disclosures, including upskilling board and management around strategic ESG priorities and connecting relevant stakeholders such as the financial reporting group and sustainability teams. For audit committees, some of their must-dos include establishing or enhancing governance and controls related to ESG data and disclosures and establishing a plan to integrate assurance into the reporting process. It's a big development in the sustainability disclosure field and a necessary one if businesses hope to thrive in a low-carbon economy.

Another area that needs audit committee attention moving forward is AI. As the body responsible for overseeing the processes by which a company monitors and manages all types of risk, the audit committee will have to keep an eye on the challenges and opportunities presented by AI in anticipation of risks related to governance and stakeholder trust.

A number of Deloitte surveys over the last two years paint a spotty picture of AI strategy and oversight. A study of over 2,000 global business leaders in 13 countries found that 94 percent believe AI will be critical to success over the next five years. But another study of corporate secretaries found that only 13 percent had a formalized AI oversight framework. Among these organizations, 29 percent reported that AI oversight was handled by the entire board, while 16 percent placed it with the audit committee.

Considering rapid developments in the field, including the emergence of generative AI, organizations can ill afford to ignore this new technology, especially as it brings with it new risks for which traditional risk management strategies may not be fit. Add to this the fact that there is no global standard for the appropriate implementation of AI; it appears that the best approach would be for organizations to proactively govern their use of AI with an eye toward maintaining stakeholder trust.

For audit committee members looking to start the conversation around the adoption and use of AI, Deloitte has drawn up a few oversight questions to consider:

• What are the company's current and potential future use cases for AI, and do any of them have an impact on financial reporting or other audit committee oversight areas?

• Has management considered opportunities to use AI that may improve financial reporting processes?

• Are processes for use of AI aligned with the company's risk appetite in terms of level of proactiveness and mitigation strategy?
  

Newly released disclosure standards and AI are just two of several areas that we anticipate will keep audit committees busy throughout 2024. As always, early planning and preparation will be key to their ability to successfully address these and other key items during what is shaping up to be another year marked by volatility and transformative changes.

As published in The Manila Times on 29 January 2024. The author is the Audit & Assurance Leader of Deloitte Philippines.