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Audit Committees – Hard labour?

19 September 2016

Much has been made of the effects of mounting regulation on the role and resilience of auditors. Less has been said about audit committees, and audit committee chairs in particular. So far audit chairs have not suffered from overmuch press attention-even when they have spectacularly misfired. The growing intolerance of excesses in executive pay have kept the public and press spotlight on remuneration committees’ chairs – unenviable individuals who can probably only be judged successful if they leave both executive directors and investors unhappy. However the audit committee chair is now very much the lynchpin of good company governance, and can consequently expect more public scrutiny.

Governance requirements and best practice haven’t stood still, and aren’t about to start doing so.  In recent years much has been added to the UK Corporate Governance Code (“the code”) that directly affects audit committees, including:

  • Reporting on the composition and workload of the committee
  • Reporting on internal audit needs
  • Reviewing whistleblowing arrangements
  • Reporting on significant financial reporting issues
  • Reporting on how it has reviewed the effectiveness of external audit
  • Reporting on non-audit services provided by its auditor.

In addition to all the above the audit committee is likely to be asked to confirm to the board that the annual report is “fair, balanced and understandable”, which is not always a straightforward judgement to make. 

The Code has now been revised again with this reporting season having seen ‘longer term viability statements’ widespread for the first time and more explicit comment on risk management and internal controls – areas which will naturally gravitate to audit committees. 

The introduction of law and regulation following the EU audit reform adds to this growing list with detailed restrictions on non-audit services provided by auditors and quite prescriptive rules on auditor tendering and appointments, as well as a more statutory basis for establishing committees’ responsibilities.  

Much of this is only mandatory for listed or public interest entities. Increasingly, though, it will be looked on as best practice and expected of others who raise equity outside their business and its immediate community. A third of AIM companies voluntarily included audit committee reports for 2014, for example. More will do so each year.

It is reasonable to look on all this as the price a company pays for using other people’s money to finance its activities.  It is a fair point to make, but the question is more about whether appropriate candidates would want to chair an audit committee with all these responsibilities. 

In a FTSE 100 or 250 company the board and its committees can expect to be well supported by the finance and secretarial teams, and will typically have six to eight NEDs. In smaller caps, fledging and AIM markets there are likely to be between two and four NEDs and a more stretched infrastructure which is not geaered to serving up complex material to board committees. The average fee for a non-executive in the smaller public company will be around £40,000, with premiums of £5,000 to £10,000 for chairing the audit committee.

The appropriate chair for a smaller capitalised company’s audit committee chair will probably be in her or his fifties or early sixties, with a successful executive career behind them (or drawing near to a close), most probably in a senior finance role in a larger business. While the range of remuneration they might expect is not an insubstantial sum, it does need to be balanced against  the personal exposure to reputation loss and the extensive workload which the chair of the audit committee is likely to shoulder, and all this in a non-executive role where direct influence is limited and reliance on others is nearly always necessary.

Many potentially good audit chairs, who could add value to UK PLC, will, I suspect, prefer to pick up their ball and take it home with them rather than play a dangerous game with their good names.