Re-imagining Audit and Risk in Economic Uncertainty
June 9, 2020
In the June 2 session from The McMaster Collaboratorium, Principal of The Directors College, Michael Hartmann discusses how boards are learning to assess organizational performance, risk and strategy and how they will need to develop an effective audit committee for the current environment and beyond with panelists Dr. Richard LeBlanc, Professor of Law, Governance & Ethics, York University and Faculty at The Directors College and Christine Williams, C.Dir., Governor, Board of Governors, Centennial College.
Audit committees have dropped the ball on non-financial risk. The greatest challenge for audit committees right now is to act. Ten question to audit committee should be asking:
- What is the board approved pandemic plan? Especially around reopening, the audit committee should be aware of the plan, any regulatory requirements and the approval process.
- Have you financially stress tested the plan? Stress test the pandemic plan and how it flows through the financial statements at realistic levels, including any loans or other funding.
- How does the plan address the health and safety of employees? This issue is now front and centre – wellness and diversity reporting was already required pre-pandemic, but during reopening you need to understand your ‘duty of care’ obligations and how measures will impact the financials in the medium and long term.
- What are the internal controls? Your risk profile has changed and the board needs to understand how management is measuring and controlling new risks.
- What is the financial strength of the company? At some point, you may need to conduct an insolvency test and understand your duties and responsibilities in that instance.
- Have you considered cybersecurity? The heightened risk of a newly remote workforce requires rapid updates to risk assessment and costs.
- Has your litigation risk changed? In the stress testing, consider the impact of potential litigation throughout your stakeholder base.
- Does your insurance cover your current needs? Pandemic related losses are not insured, but there may be other areas your insurance is now lacking, including D&O protection.
- Do you get reporting on potentially fraudulent behaviour? The incidents of fraud and whistleblowing have increased in the wake of the upheaval of business as usual and the audit committee should be getting regular reporting on any suspicious dealings.
- Are you financially literate and pandemic educated enough to continue effectively? Most audit committees are dedicating time and resources to continuous education about the pandemic and expanding their financial literacy skills.
The board has ultimate oversight on risk. The financial implications and impact from the pandemic are staggering and will require tighter oversight. Getting the composition of the audit committee right is more important than ever before.
Going forward, boards will place much more emphasis on risk coming out of changes to business models in every industry. More opportunities for dialogue to ensure that assumptions are always tested may also lead to more frequent board and committee meetings.
Board and audit committee members require diversity of thought to succeed. The pandemic has provided an opportunity to look in new areas for members and the importance of governance, financial and innovation training.
Past crisis’ have been financially based – but this pandemic has pressed on non-financial issues. The pandemic is giving directors the confidence to work more effectively with management to get answers to tough questions.
Boards will be looking for different skill sets moving forward, with a lens on soft skills such as proven creativity, crisis experience, leadership, and curiosity. Business has changed and the new normal will be different.
Innovation is moving much faster now which represents both risk and opportunity. Leaders are taking this time to move forward initiatives for better stakeholder engagement.
Now is the time to be courageous on moving to improve the diversity gaps on the board and committees and ensuring a bias-free environment. Gender and ethnic diversity will remain at the top of the agenda and represents a non-financial risk.
It is time to act – ask the hard questions.
Watch key messages from the webinar here