Evaluate the role of the Audit Committee Chair in

ensuring that the Audit Committee is effective

Introduction

The National Audit Office (NAO) state that the role of the Audit Committee is fundamental to ensuring
that organisations function according to good governance and accounting and auditing standards, and
adopt appropriate risk management arrangements and that a well functioning Audit Committee is key
to helping organisations achieve good corporate governance (2012 NAO).

Deloitte, in their Audit Committee effectiveness, 2020 Framework, state that the Audit Committee
Chair sets the tone for and leads the Audit Committee.

The FRC/ICAS state that many of the prominent failures of corporate governance in the last couple of
decades have involved breakdowns and deficiencies in communication, internal control processes
and financial reporting. (2012 FRC/ICAS).

Therefore, it is extremely important to ensure that the Audit Committee is well run to ensure that all
responsibilities are met, which in turn will enable the Audit Committee to meet the needs of the
shareholders. Hence, the aim of the research is to evaluate the role of the Audit Committee Chair in
ensuring that the Audit Committee is effective.

Effectiveness is difficult to define, but this literature review has identified that the effectiveness of the
Audit Committee goes beyond just meeting the regulatory requirements of the UK Governance Code.
In fact, Pwc state that an effective Audit Committee goes beyond just meeting the stock exchange
requirements (2020 Pwc). Pwc also state that a high-performing Audit Committee starts with a good
Chair. Good leadership and effectiveness go hand-in-hand. Effective Chairs can bring out the best in
other committee members, management and external auditors (2020 Pwc).

Initial analysis (literature review):

This literature review has identified a number of common themes with regards to the role of the Audit
Committee Chair, in ensuring that the Audit Committee is effective. These themes revolve around:

• Ensuring that the responsibilities of the Committee are documented in an Audit Committee
Charter and that, although the role of the Committee is evolving and expanding, the
Committee stays focused on what is important.
• The diversity, composition and skills of the Committee, including having the financial skills
required to provide oversight of the integrity of financial statements and the external audit.
• Having good induction and training processes in place, including ensuring that the Committee
have a good understanding of the organisation, its principal risks and controls and culture.
• Being a strong leader and maintaining good relationships, whilst also being able to maintain
independence and challenging management.
• Efficient and effective management of Committee meetings and ensuring that the Committee
receives the right information in a timely manner.
• Having sufficient knowledge to oversee the performance of internal audit and its adherence to
the IPPF.
• Recognising that Audit Committee effectiveness is an evolving process and, as such, suring
that the Committee has a process for self-evaluation and continuous improvement in place.

The following pages will explore these themes in more detail.

The starting point for an effective Audit Committee is the Charter and the Chair plays the key role in
developing the Audit Committee Charter. Pwc state that a clearly written Charter helps the Audit
Committee and others to understand its role and responsibilities, and is an essential starting point
(Pwc 2020). The Auditing and Assurance Standards Board state that it is important to clearly define
the responsibilities of the Audit Committee in its Charter, which should be formally approved by the
board and communicated to shareholders. (2017 Auditing and Assurance Standards Board).
Today, the responsibilities and expectations of the Audit Committee are increasing. EY state that
Audit Committees are undergoing a period of transition. They are transforming from backward-looking
committees focused on a narrow financial remit, to more forward-looking bodies tasked with
evaluating a wider set of risks (2019 EY). ICAS state that there is an increasing volume and breadth
of issues (for the Audit Committee) to monitor & address, and expectations on Audit Committees have
increased. They also state that any further imposition on the Audit Committee of additional
responsibilities needs to be carefully considered (2019 ICAS) and KPMG state that “Mission creep” is
an important issue for Audit Committees (2018 KPMG).

Therefore, as stated by KPMG, a key role for the Audit Committee Chair is to ensure that the Audit
Committee does not take on too much responsibility beyond its core responsibilities and that the skills
and experience of Committee members align with its responsibilities (2018 KPMG). Responsibilities
may be ever evolving and increasing but the Chair must ensure that the committee stays focused on
what is important and that the audit Charter clearly defines the responsibilities of the Audit Committee.

The composition of the Committee is another key area for the Chair to consider. KPMG state that the
Chair should consider the overall Audit Committee composition, ensuring the Audit Committee
includes the right mix of people with the appropriate mix of hard and soft skills (2018 KPMG). Pwc
state that having clear membership and selection criteria is a key element of effectiveness, as the
Audit Committee will only be as good as its members and that a properly established Audit Committee
with appropriate membership will generally add value (2020 Pwc).

Financial expertise on the Audit Committee is imperative to ensure that the committee is able to
provide oversight to the integrity of financial statements and the external audit. Pwc state that the
Audit Committee should not place undue reliance on the skills of any single individual (2020 Pwc).

The Federation of European Accountants (FEE) et al, in their Summary of Roundtable Discussions on
the Role of the Audit Committee, state that all participants generally agree that diversity in the
composition of the Audit Committee is important. Participants believe that diversity in experience
achieved through a combination of financial and non-financial perspectives on the Committee
promotes objectivity and scepticism (2013 FEE et al). The FRC/ICAS state that interviewees, in its
discussions with leading Audit Committee members, said that the long-term effectiveness of the Audit
Committee will, in part, depend on its ability to renew itself. Infusing fresh talent with new ideas will
offer different perspectives. Diverse backgrounds and varied experience enhance the efficacy of
Committees (2012 FRC/ICAS). Pwc state that it is important not to overlook “soft” skills. Skills like
negotiation, teamwork, problem solving and communication can complement the critical “hard”
financial and technical skills that Audit Committees need (2020 Pwc).

The Auditing and Assurance Standards Board state that the Audit Committee's knowledge and
proficiency are enhanced when new members are appropriately acquainted with the Audit
Committee's objectives and practices. All new members and existing directors need to be well briefed.
Induction can be undertaken in many different ways, ranging from formal orientation programmes to
informal discussions, including the provision of relevant documentation. New members need to
understand the Audit Committee's role, objectives and responsibilities, be familiar with its
relationships with management and the internal and external auditors, and have a sound knowledge
of the entity’s operations and the environment in which it operates, including the entity’s code of
conduct. They also need to understand the time and effort they will need to devote to their Audit
Committee membership (2017 Auditing and Assurance Standards Board).

KPMG state that the Audit Committee Chair should consider the need for focused education and
development programmes on company specific issues to help keep the Committee’s skills sharp,
whether through external training or events or presentations by subject matter experts during
Committee meetings (2018 KPMG). Therefore, for an Audit Committee to be effective, the Chair must
ensure that processes are in place for the induction and continuous training of Committee members.

It is also imperative that Committee members have a good understanding of the organisation and its
culture. The FRC/ICAS state that Committee members should develop an understanding of the
business, for example through site visits (2012 FRC/ICAS) and KPMG state that the Chair should
encourage the Committee to get out and “kick the tyres”, visiting different company locations, meeting
local employees and the local audit teams. The goal is to obtain a better understanding of the issues
facing the business, including the problems and concerns of employees and other stakeholders as
well as the tone and culture within the organisation (2018 KPMG). ICAS state that Audit Committee
Chairs have to focus on keeping the Audit Committee members engaged where there is an increasing
need for Audit Committee Chairs and Audit Committee members to understand not just the
company’s operations and businesses but its culture (2019 ICAS).

Leadership is an essential skill of an effective Chair. KPMG state the importance of the Audit
Committee Chair’s leadership - in setting the Committee’s tone, work style, and agenda - is vital to the
Committee’s effectiveness and accountability, and cannot be over emphasised (2018 KPMG). The
FEE et al, in their Summary of Roundtable Discussions, state that generally, participants in all
jurisdictions emphasised the importance of the Audit Committee Chair to be a strong leader in order
to promote Audit Committee effectiveness (2013 FEE et al).

Maintaining good relationships is another key skill required of effective Audit Committee Chairs. The
FEE et al, state that the Chair should foster productive relationships with the Board of directors,
management, and the external and internal auditors, and the Audit Committee should serve as a
communication hub for matters raised by these parties. The Audit Committee Chair also should
promote robust communication within the Committee itself, and encourage Audit Committee members
to ask critical questions of management, internal audit and the external auditor (2013 FEE et al). ICAS
state that the Audit Committee has a key role in ensuring the right balance between challenging and
supporting management, and in ensuring that the external auditors provide the necessary challenge
to management whilst maintaining a good working relationship (2019 ICAS). FRC/ICAS state that the
onus lies with the Audit Committee Chair to encourage open and frank discussion at the board level
(2012 FRC/ICAS). Therefore, the ability of the Committee to maintain good working relationships,
whilst simultaneously challenging and, when required, asking difficult questions of management
should be a key consideration of the Audit Committee Chair.

As non-executive directors, members of the Committee are not full time employees of the
organisation and, as such, the Audit Committee has a limited amount of time to carry out a wide range
of functions; therefore, it is essential that the Chair ensure that meetings are efficient. KPMG state
that the Audit Committee Chair plays a critical role in focussing the agenda on the important issues
(2018 KPMG) and the Auditing and Assurance Standards Board state that how Audit Committee
meetings are conducted will greatly influence the ability of Audit Committee members to achieve the
Audit Committee's objectives (2017 Auditing and Assurance Standards Board). Pwc state that the
Chair should be a good facilitator who cuts off low-value discussions (2020 Pwc).

Pwc state that the Audit Committee should meet often enough to undertake its role effectively (2020
Pwc) and Deloitte state that there should be a clear plan to ensure that all matters falling within the
remit of the Audit Committee are covered over the year (2020 Deloitte). KPMG state that many Audit
Committee Chairs also set aside time at each meeting for the Audit Committee to take a deep dive
into an important area of risk, accounting policy, judgement estimate or the company’s use of non-
GAAP measures (2018 KPMG). As such, the quantity and quality of meetings held throughout the
year is a key area of focus for the Chair.

The FRC/ICAS state that a principle challenge facing Audit Committees is the quality of the
information they receive. There is an imperative that Audit Committees undertake all reasonable steps
to ensure they have access to the ‘right’ information, in an appropriate form and on a timely basis.
This encompasses formal reports and presentations, but also informal discussions with management
and professional development activities for Audit Committee members (2012 FRC/ICAS). KPMG state
that the Audit Committee Chair plays an important role in ensuring both the quality and timeliness of
pre-meeting materials. For the Committee to make the most effective use of its time together, all
Committee members should receive and review materials prior to the meeting, and make requests for
any necessary additional information in advance, so that members can devote more time during the
meeting to discussion (2018 KPMG).

The FRC/ICAS state that oversight of the internal audit plan sits at the heart of the Audit Committee
function (2012 FRC/ICAS). KPMG state that Audit Committee Chairs often help clarify the role of
internal audit and ensure that the Audit Committee, CFO, and others have a shared vision as to what
the role of internal audit is at the company (2018 KPMG). The IIARF state that one “foundational,”
non-negotiable internal audit activity is practicing in accordance with the elements of The IIA’s
International Professional Practices Framework (IPPF) (2013 The IIARF). The IIA’s position on the
role of internal audit and, more specifically, the Chief Audit Executive (CAE) is clear; follow The IIA’s
International Standards for the Professional Practice of Internal Auditing. The IIA state that internal
audit is most effective when it follows IIA Standards, and its resource level, competence, and
structure are aligned with organisational strategy and core business competencies. The Audit
Committee entrusts the CAE to operate the activity with integrity and competency to achieve its
purpose (2019 IIA). Deloitte state that the Audit Committee ensures that the internal audit plan is
aligned to the key risks of the business (2020 Deloitte). Therefore, the Chair of the Audit Committee
must have a knowledge of the requirements of the IPPF and the CAE should report to the Audit
Committee their adherence to the IPPF annually. The role of internal audit is to provide independent
assurance that an organisation's risk management, governance and internal control processes are
operating effectively (IIA) and, as such, the Audit Committee must ensure that the internal audit
function is performing optimally.

The IIARF state that in realigning their audit plan to the changing risk profile of their organisation it is
important that the Chair has an understanding of the risk profile of the organisation (2013 The IIARF
White Paper). KPMG state that a key role for the Audit Committee Chair is to ensure that all
committee members understand the critical risks to the business, risks to its strategy, its business
model or its survival. (2018 KPMG). The FEE et al state that there was acknowledgement across
jurisdictions that risk management is one of the most challenging areas for Audit Committees.
Participants noted that risk oversight must be a continuous process to be effective and suggested that
Audit Committee agendas could be prioritised by risk (FEE et al). It is a requirement of the audit
Committee to review the company’s risk management systems, unless risk management is expressly
addressed by a separate board risk committee, in which case, the Chair of the Audit Committee must
ensure that the Committee communicates so that nothing falls between the gaps.

KPMG state that Audit Committee Chairs recognise that Audit Committee effectiveness is an evolving
process that requires staying abreast of both boardroom dynamics and fast changing business
developments so that the Committee has the knowledge and skill needed to evaluate the information
it receives and on which it is basing its recommendations. The Audit Committee Chair should seek to
assess whether the Audit Committee is performing effectively and, if appropriate, improving. KPMG
also state that the Audit Committee’s self-assessment process is critical to its continuous
improvement. An effective evaluation process begins with a process designed to facilitate an honest,
constructive, and insightful assessment of the strengths, weaknesses and gaps that leads to
meaningful follow-up and action. Evaluations may be performed in a variety of ways and there are no
one ‘right’ way to do them. The UK corporate Governance Code recommends that Committee
evaluations be conducted on an annual basis and be subject to external facilitation at least every
three years. The Chair of the board can help address performance issues at the Committee and
individual director level though most Audit Committee Chairs would look to assume ownership of the
evaluation process (2018 KPMG).

Literature review conclusion:

Much guidance has been written on the effectiveness of Audit Committees and the role of the Chair.
This literature review has identified a number of common best practices of the Chair and therefore the
primary research will focus on making recommendations as to how Audit Committee Chairs can
enhance the effectiveness of the Audit Committee.

Further analysis (Interviews with CAEs):

Following on from the literature review, a number of interviews were conducted. The interviewees
were all experienced CAEs or Consultants carrying out a diverse range of work in the areas of internal
audit (including acting as CAE for various organisations), risk management and corporate
governance.

At a high level, it is clear that the themes identified in the literature review are consistent with real life
experience of effective Audit Committees. All of the discussions with regard to best practices seen by
the interviewees fell under one of the seven themes identified. As would be expected, in relation to
real world experience, the experience of the interviewees was mixed in terms of Audit Committee
effectiveness, but the general consensus was that there is major scope for improvement, particularly
in the role of monitoring the effectiveness of the internal audit function.
In terms of induction and training, when related to understanding the organisation, its strategy and
culture etc. the general experience of all interviewees was that this is good and most organisations
have some form of formal induction and training processes in place. In contrast, it was felt that, in
many cases, Audit Committee members do not fully understand what they are being charged to do,
particularly in the areas of reviewing risk management systems and monitoring the effectiveness of
the internal audit function. Generally, all participants made some reference to a lack of understanding,
and therefore that raises questions on the type of induction and training received.

Examples of best practice seen, included Committees producing an annual summary of the training
received during the year.

All agreed with the literature review that the responsibilities and expectations of the Audit Committee
are increasing, with a greater focus on technology, digitalisation and Environmental, Social &
Governance (ESG) highlighted. This wider set of risks brings a requirement for a broader focus and
increased breadth of issues that need to be monitored and addressed. That said, in the interviewees’
experience, the main skill set to be found on Audit Committees is still financial.

A common issue raised in the interviews was the lack of time that the Audit Committee has to carry
out its responsibilities. Linked to the issues raised on induction and training, there was also a general
consensus of a lack of a full understanding of the role of the Audit Committee, and the discussion
highlighted areas such as risk management, where it was common that the Committee saw this as
exclusively a responsibility of management. The literature review recommended that Committees
conduct ‘deep dives’ into specific risk areas, but from the interviewees experience this was rare, on
which one commented that this was disappointing.

Given the lack of time, coupled with the increasing responsibilities, all interviewees agreed that a key
role for the Audit Committee Chair is to ensure that the Audit Committee does not take on too much
and to ensure that the skills and experience of Committee members align with its responsibilities,
which should be clearly outlined in the terms of reference.

It was also stated that it is rare for the Chair of the Audit Committee to oversee the remuneration and
carry out a review of performance of the CAE, with this normally being carried out by management.

In terms of leadership, in my literature review I had written ‘The FEE et al, in their Summary of
Roundtable Discussions, state that generally, participants in all jurisdictions emphasised the
importance of the Audit Committee Chair to be a strong leader in order to promote audit Committee
effectiveness (2013 FEE et al)’. This was the one area where the interviewees had a slight
contradiction to the academic literature. Although the question was raised ‘how do you define strong
leadership?’, it was felt that the ‘Chairing’ and facilitation skills of the Chair were much more important
than strong leadership skills. The interviewees stated that they had experienced Audit Committee
Chairs with vastly differing leadership styles and personality types but a common theme of the best
Chairs was an ability to command respect and to ensure a no blame culture within the Committee. An
ability to communicate well, maintain good relationships and effectively challenge management were
also common themes of the best Chairs.

Aside from the oversight of the internal audit function, Committee meetings was the area that
generated the most discussion during the interviews. One interviewee said that they could not
underestimate the importance of the Chair’s role in ensuring good timekeeping and keeping to the
agenda in meetings, as meetings can easily go off on a tangent. They also spoke of their experience
of Committee members, who have a particular technical knowledge or skill, spending too much time in
the meeting focused on issues related to their own knowledge area, and losing focus on the
‘oversight’ role, going into too much detail, as if they were assuming managerial control. They felt that
the best Chairs were able to prevent this from happening.

The quality and timeliness of information was stated as key to a successful meeting. Opinions were
mixed, with experience of too much or too little information provided, as was the use of pre meetings
to review or clarify issues prior to the formal meetings, all agreeing that these were very useful and
important, but not common practice.
Another common theme of the interviews was a feeling that internal audit did not receive sufficient
time at Audit Committee meetings and, that in general, there was a lack of quality questioning from
the Committee members during meetings. All of the interviewees talked of their experience of feeling
as if they were ‘going through the motions’, presenting the audit plan, progress against plan etc. with
little focus on ‘will management get this done?’ and providing effective challenge to the business.

Examples of best practice seen in managing meetings included using a risk register, aligned to the
strategic objectives of the organisation, to drive the meeting discussion and having a summary page
on information packs which clearly state what has been provided for information and what has been
provided for action.

Another common view was that good Chairs spend time with members and CAEs outside the formal
meetings, but again the view was that this was not common.

In terms of the skills of the Chair, reiterating the discussion on training and meetings, the interviewees
felt that the main skills required of the Chair were in understanding the responsibilities of the
Committee and ensuring that the meetings were efficient, rather than any specific technical skills. In
fact, it was generally felt that the technical skills of the Chair were not overly important. One
interviewee said that ‘the Chair needs to be able to refer to the best person in the group’. The soft
skills of the Chair, rather than their technical skills, were considered much more important.
Communication skills, the ability to Chair meetings and command respect, and setting the tone and
culture of the Committee, including having a no blame culture but offering challenge to management,
were all discussed and highlighted as being important. That said, in the experience of the
interviewees, more often than not the Chair had a finance background.

Two interviewees highlighted the importance of succession planning, in relation to refreshing the
membership of audit Committees as being very important. The advantages of replacing a member of
the Committee were seen as the introduction of new ideas and a new perspective but the
disadvantage is the loss of corporate knowledge and experience of the organisation. Therefore, it is
important that organisations do not end up being forced to replace all Committee members at the
same time, which the interviewees said they had experienced happening more than once.

All interviewees felt that diversity, in terms of gender and ethnicity was important and was improving,
although interviewees felt that, in most cases, the age profile of Audit Committees has not changed
very much. As stated above, all interviewees talked of the changing role of the Audit Committee and
the increasing breadth of risks to be considered, but said it was still common that the main skill set of
Committees is related to finance and financial reporting.

As could probably have been predicted, given the background of both the interviewer and
interviewees, the role of the Committee in overseeing external & internal audit generated the most
discussion. All agreed that it is their experience that the Audit Committee is more focused on the work
of the external auditor than that of internal audit. It was also felt that the Committee are much more
effective in discharging their role with regards to the external audit than they are for internal audit.
The opinion was that this was likely a consequence of the work of the external auditor being reported
externally. One interviewee stated that the investors ‘hang their hat’ on the work of the external
auditor. There was a general consensus that Audit Committees are, in the main, effective and diligent
in relation to the appointment, scope and review of the effectiveness of the external auditor.

It was a common theme that the interviewees felt that the Audit Committee lacked an understanding
of the role of internal audit. One interviewee stated that ‘Audit Committee Chairs suffer the same lack
of understanding on the role of internal audit as most CEO/CFOs do’. Although, in contrast, one
interviewee stated that, in his current role, the CFO was an ex CAE which helped with the
organisation’s understanding of the role of internal audit (although he stated that there was still more
focus and time spend on external audit than internal audit at Committee level).

In terms of audit functions operating in line with the IPPF, one interviewee stated that they would be
‘amazed’ if a member of the Audit Committee had any knowledge of the IPPF. Another stated that if
you carried out a survey of Audit Committee members on compliance to the IPPF, they would expect
the most common answer to be ‘What is the IPPF?’ Another comment made was that the interviewee
would estimate that 90%+ of Audit Committee or Board members don’t fully understand the role of
internal audit, and many don’t understand how to assess the performance or quality of the internal
audit function. In this area, EQAs was another area of discussion during the interviews. All
interviewees said that it is very common for audit functions not to have any external quality
assessment carried out and one interviewee stated that his organisation had not carried out an EQA
in the last 12 years. Monitoring quality was very often done by ‘gut feel’ rather than formal
assessment in the experience of the interviewees. The lack of a requirement for an EQA being
defined in the terms of reference of the Committee was also felt to be common.

One interviewee commented that they felt there was a ‘Long way to go’ for Audit Committees,
particularly in the corporate space with regards to the oversight of internal audit.

The role of CAEs in assisting the Committee, in both its understanding of the role of internal audit and
its knowledge of the IPPF was discussed, with a common view being that they could do more in this
area.

Finally, in the area of evaluation and continuous improvement, in the opinion of all participants it was
felt that most Committees do an annual self-assessment and some get external effectiveness
reviews. Although, in relation to the role of the Chair, one participant stated that it is usually unclear
how the effectiveness of the Chair is assessed, and against what criteria.

Reflections:

I have three main areas of reflection. First, the seven themes for effective Audit Committees identified
in the literature review corresponded accurately with the lived experience of the interviewees in
relation to effective Committees and Chairs. Only one area, the importance of ‘leadership skills’
caused any divergence, although strong soft skills, the ability to command respect, Chair meetings
effectively and challenge management were deemed essential Therefore, for any Chair looking to
improve the effectiveness of their Committee, setting out a plan to address the seven areas identified
would be an efficient process to follow.

Secondly, from our discussions during the interviews, there are a number of ‘golden threads’ that run
through and impact the effectiveness of audit Committees. For example, a lack of time for the Chair
can mean that the Chair does not undertake pre reviews of information, spend time with stakeholders
outside of formal meetings or have a good understanding of the business and its risks. This can have
a knock-on effect to the quality of formal meetings, affecting the effectiveness of the Committee.

A similar example is the lack of broad skills and experience within the Committee, which results in an
over focus in a specific area, which could result in Committee meetings being focused on one area of
the business (likely to be finance), again impacting the effectiveness of the Committee.

Another would be a lack of proper induction and training resulting in a lack of clarity on responsibilities
and a lack of clear focus which means that the Committee experiences ‘mission creep’, which has a
knock-on effect on meetings and overall Committee effectiveness.

The importance of quality Committee meetings cannot be underestimated, and the timeliness and
quality of the information presented to the Committee is key in ensuring meetings are efficient and
effective.

Finally, although much has been written on the role of the Audit Committee Chair in ensuring that the
Audit Committee is effective, from the interviews conducted it would appear that there are still many
Audit Committees that are not operating as effectively as they could be. This was particularly
prevalent with regards to its oversight of the internal audit function and the risk management oversight
responsibilities of the Audit Committee. Generally, the role of monitoring financial statements and the
oversight of the external auditor being seen as the most effective areas of Committees. In addressing
the problems experienced by the interviewees, in relation to the Committees oversight of internal
audit, one interview felt that the issue may be ‘too big’ for the Institute of Internal Auditors (IIA) to deal
with, but also that no one else would be interested enough to do anything about it.
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