On the audit committee's agenda has been saved
On the audit committee's agenda
Top of mind topics for audit committee members
A series of periodic audit committee-focused publications that examines topics impacting the audit committee’s responsibilities and priorities
2023: The year of the risk-centric agenda
This edition of On the audit committee’s agenda discusses some areas that are most likely to be the subjects of audit committee risk oversight in 2023 including: financial reporting and disclosure; enterprise risk management; cybersecurity; and environmental and climate change.
Strategic intelligence: An integrated approach to ERM for a new era of emerging risks
Given the rapid rate at which risks are emerging and evolving, a dynamic approach to enterprise risk management (ERM) underpinned by strategic intelligence is no longer an aspiration for many companies. It is an imperative. As a focus on risks, opportunities, and performance related to environmental, social, and governance (ESG) issues intensifies across the marketplace, a dynamic approach to ERM powered by strategic intelligence can help integrate ESG into the business.
Emerging fraud risks to consider: ESG
Many audit committees are highly focused on the risk of financial statement fraud, but a case is growing for audit committees to expand their discussion of fraud risk to encompass a growing variety of environmental, social, and governance (ESG) issues. ESG-related topics increasingly appear on audit committee agendas and factor into financial reporting discussions, but they tend to arise less often in the context of discussions about fraud risk.
Investors continue to demonstrate interest in understanding risks related to ESG issues, which is helping fuel regulatory focus on reporting and disclosures. The SEC has already issued proposals to expand disclosures related to cybersecurity and climate issues, and further proposals are expected in areas such as human capital. These proposals are likely to significantly increase the scope of information that will be included in regulatory filings in the coming years.
What’s on the horizon for 2022?
The past year has made it clear that many of the fundamental changes to organizations that were brought on by the pandemic are here for the long haul. The impacts of widespread remote work, accelerated digital transformation, and shifts in talent dynamics have been far-reaching, and the full scope of their effects—and related risks—is not yet certain.
The audit committee’s role in overseeing risk and financial reporting is more important than ever in this evolving context, as organizations navigate increasingly complex reporting requirements and a shifting regulatory landscape. Effective oversight requires committee members to stay up to date on these changes while understanding how emerging risks may impact the organization. This publication highlights five areas of focus—financial reporting and controls; enterprise risk management; environmental, social, and governance; cyber risk; and digital finance transformation—that likely will be recurring topics of discussion for audit committees in 2022. While these topics cover only certain aspects of audit committee responsibilities, their importance and prominence on agendas is reflected in audit committee member survey responses captured in the recent Deloitte and CAQ Audit Committee Practices Report. Each topic highlighted also includes probing questions audit committees can consider posing to management to help them stay ahead of issues, navigate pitfalls, and fulfill the organization’s responsibilities to investors and other key stakeholders.
Navigating the ESG journey in 2022 and beyond
The conversation within and beyond the boardroom around environmental, social, and governance (ESG) is rapidly maturing. In recognition of the important role ESG plays in driving long-term value creation, more and more boards are focused on and are disclosing how their governance structure is evolving to consider ESG more intentionally. Having a defined plan for overseeing the integration of ESG and the interconnectedness across the pillars of "E", "S", and "G" into strategy and disclosure helps demonstrate the significance and prioritization of ESG efforts from the top, to both investors and broader stakeholders.
Amid this shift in board governance, investors continue to increase expectations on climate and ESG matters, as noted by the number and breadth of shareholder proposals on related issues in the 2021 proxy season. As investors update and finalize their proxy voting guidelines for 2022, there is the potential for more votes to be cast against board directors who do not demonstrate an adequate understanding of ESG and sufficient disclosure.
Change is also coming quickly on the regulatory front. The SEC has disclosed its regulatory agenda and has included four important areas that fall under the ESG umbrella: climate change, cyber risk governance, board diversity, and human capital management; proposed rules are expected in early 2022. The SEC also has begun to focus more on ESG-related comment letters. In late September, the commission issued a “Dear CFO” letter that provided a sampling of the types of comments issued about climate change and sustainability disclosures, with a particular emphasis on the consistency of climate-related risk disclosures and the relevance to financial reporting.
In addition, there has been significant movement toward the global convergence of standards. The IFRS Foundation announced at the UN Climate Change conference in Glasgow in early November the formation of the International Sustainability Standards Board (ISSB), which will consolidate the Climate Disclosure Standards Board and the Value Reporting Foundation (which includes the Integrated Reporting Framework and Sustainability Accounting Standards Board (SASB) Standards) by June 2022. The global ISSB standards are intended to elevate sustainability standard setting to be in line with that of financial reporting and accounting, and will promote transparency and consistency in sustainability disclosures to better inform decision-making for users of general-purpose financial reporting.
Other standard-setting entities enhancing their involvement in ESG include FASB, which has released a staff educational paper on the intersection of ESG matters with financial accounting standards; and the Commodity Futures Trading Commission, which has established a climate risk unit. With the pace of the ESG developments expected to accelerate rapidly in 2022, company management and boards should be focused on enhancing governance structures and the control environment around managing, and overseeing, ESG risks and opportunities and delivering high quality disclosure.
The strategic audit committee: Navigating 2021
It’s been said a lot: 2020 was a difficult year. The effects of the COVID-19 pandemic have led to unprecedented economic conditions and continued uncertainty in the business environment. This has resulted in increased complexities and risks that may have long-term implications. Seemingly overnight, employees began working virtually, and boards and audit committees had to find new ways to engage with management and their auditors in order to effectively execute their oversight responsibilities.
As companies continue dealing with the impact of the pandemic, the audit committee’s agenda and its processes will need to remain flexible to address issues and challenges as they arise. To provide effective oversight and help management navigate these challenging times, audit committees need to ask direct, targeted questions to understand management’s processes and decisions, as well as alternatives that were considered when addressing key issues.
We’ve been operating in this environment for three quarters and have learned much. Audit committees will continue to face an expanding agenda, and prioritization will be critical. While the role of the audit committee is vast, this publication focuses on two areas of oversight that may be critical for audit committees in the upcoming year: financial reporting and internal controls, and risk. Our focus is on providing a set of topics and additional resources for audit committees to consider as they manage their 2021 activities.
Year-end accounting and financial reporting considerations: Questions for audit committees to consider
The current business and economic landscape is unprecedented. With little to no warning, companies have had to adjust to a variety of challenges, including supply chain disruptions, government-mandated shutdowns, implications of the CARES Act, working remotely, and more. While companies have managed through these challenges for the past several months, this year-end close may be like no other as those issues continue to evolve and new challenges arise. This continued uncertainty in the business environment, combined with increasing the complexities and risk, will require a high degree of judgement as companies approach the year-end reporting cycle. Not surprisingly, audit committee oversight will be critical. In fulfilling their governance role, audit committees may want to discuss management’s approach and conclusions to 10 common topics during the year-end reporting cycle.
Defining the role of the audit committee in overseeing ESG
While 2020 has been a challenging year for many companies, the pandemic has provided a reason to spotlight the importance of a purpose-driven strategy to drive business and societal value and highlighted the interrelationship between long-term corporate strategy, the environment, and society. Many companies have also reevaluated their corporate purpose and ability to drive the long-term sustainability of their enterprise by addressing environmental, social, and governance (ESG) strategies and challenges.
The ”G” in ESG and the important role the board of directors and each board committee plays in overseeing the company’s transparency around sustainability initiatives continues to be a primary focus in the ESG conversation. The “G” can be described as the governing structure, policies, and practices employed by an organization to define responsibilities and decision-making rights that provide the foundation for overall accountability and credibility. Included in this is how the board defines its committee structure and delegates oversight responsibility across the board and its committees.
Audit committee challenges and priorities in the upcoming quarter and beyond
Does it feel like Groundhog Day? On a personal level, it may feel like each day blends into the next, and many of us find ourselves waiting for the current conditions to pass so things can get back to normal. But companies can’t simply take a wait-and-see attitude. They need to respond quickly to the change in the business landscape, both internally (e.g., forecasting, systems, and process) and externally (e.g., communication with stakeholders, go-to-market strategies). It’s not only about how long the current environment will last, but how to position the company in the current environment and prepare for the “new normal.” If companies stay the course and don’t evolve during the pandemic, they are likely to fall behind competitors.
Audit committees have a critical role in helping companies evolve and thrive in this environment. To provide effective oversight and help company executives navigate these challenging times, audit committees need to ask direct, targeted questions of management to understand what alternatives were considered and chosen in addressing key issues. Audit committees should be aware of issues that are top of mind, trending, and ongoing, as well as the tension points, challenges, and alternative solutions associated with those issues.