1. finance
2. accounting and auditing

Audit Committee Forum
Working Group
Namibia
05 March 2015
1
kpmg
Agenda
1.
Opening and welcome
2.
Apologies
3.
Approval of Minutes of the previous meeting
4.
ACF Packs: Hard - or Electronic Copy?
5.
Topic for discussion:
Auditor’s Report Changes.
Audit
Committee
Audit
Forum
Committee
Forum
30 January 2003
Working
Group
Presenter: Tina Davidson, Senior Manager from
KPMG DPP South Africa
6.
Any other business
7.
Closure
2
ABCD
Documents distributed for discussion

Minutes of the ACF Meeting held on 09 October 2014

Presenter Slides - Auditor’s Report Changes.

Additional reading material:
• 2015 Global Audit Committee Survey
• ACF – Alert 18 – January 2015
• ACF – Alert 19 – January 2015
• ACF – Position Paper 15
Audit
Committee
Forum
Working
Group
– Guidelines for audit committee on tax governance.
– Updated December 2014
3
ABCD
Published position papers
Audit
Committee
Forum
Working
Group
Paper 1
Guidelines for establishing a private sector audit
committee
Paper 2
Guidelines on questions that an audit committee
could consider before recommending an entity's
financial statements for approval by the board
Paper 3
Guidelines for the audit committee chairperson
Paper 4
Guidelines for audit committees on approving nonaudit services by the external auditor
Paper 5
The Corporate Laws Amendment Act, 2006 and
guidance on the developing role of the audit
committee
Paper 6
The role of the audit committee in respect of Risk
Monitoring
Paper 7
The internal audit function and the evaluation
of its effectiveness
Paper 8
The evaluation of the external auditor’s audit
of the financial statements
Paper 9
Guidelines for assessing the performance of
an audit committee
Paper 10
Guidelines for the audit committee’s assessment
and response to the risk of fraud
Paper 11
Audit committee guidelines for evaluating
whistleblower channels
Paper 12
Guidelines to audit committees on Reportable
Irregularities and the impact on the audit
committee
Paper 13
Guidelines for the audit committee’s approach to
Information Technology (IT) risk
Paper 14
Guideline for preparing an annual plan for audit
committees in formulating their meeting agendas
for the financial year
Paper 15
Guideline for audit committee on tax governance
ABCD
Proposed Meeting Dates – 2015
Namibian ACF Working Group
Thursday – 05 March 2015
Thursday – 21 May 2015
Audit
Forum
Committee
Working
Group
Thursday – 13 August 2015
Thursday – 08 October 2015
Venue
KPMG Training Centre
@ Unit 7 Sinclair Park, No. 6
Sinclair Street
•Kindly park at on the KPMG
Time
16h00 – 18h00
See attached directional
map
premises
(Adele Van der Bank061 – 387 520)
[email protected])
5
ABCD
ABCD
Minutes of the Audit Committee Forum: KPMG Namibia Internal Survey.
Held KPMG Training Centre on 09 October 2014 at 16:00 pm
Present
See list
Apologies
Brigette Weichert (Namibia Stock Exchange)
Jens Kuehhirt (Old Mutual Namibia)
Birgit Eimbeck (Standard Bank of Namibia)
1
Introduction
1.1
Robert Araeb welcomed all present at the meeting and recognized
apologies from those that were not able to attend.
2
Approval of minutes of the previous meeting
2.1
The minutes of the previous meeting were approved with no alterations.
3
KPMG Namibia Internal Audit Survey
3.1
Introduction:
Robert introduced the KPMG Advisory team that assisted with compilation
of KPMG Namibia’s Internal Audit Survey.
He continued explaining the 3 main focus areas of the survey: The
Positioning, People and Processes of the Internal Audit Function. The
questions in the survey were specifically tailored to these areas.
The survey was distributed to 120 participants and 60 of them responded.
Almost all the sectors participated. The majority of the respondents were
however from the Banking, Financial Services and Energy and Natural
Resources sector.
The individuals to whom the survey was sent were Audit Committee
Members, Chief Executive Officers, Managing Directors and Heads of
Internal Audit functions. Respondents were more or less equally split
amongst the surveyed individuals.
About 66% of the sample had in-house internal audit functions. The sectors
with the most in-house functions were the Energy & Natural Resource and
the Educational Institutions sectors.
Minutes of the ACF meeting on 09 October 2014 KPMG Training Centre.doc
ABCD
Minutes of the Audit Committee Forum: KPMG
Namibia Internal Survey.
9 October 2014
3.2
Survey Results and Findings:
3.2.1 Positioning:
Most of the participants felt that Internal Audit had an import role to play
in contributing to the control environment within their organizations.
Surprisingly most of the participants were satisfied with the work of the
internal audit function. CEOs and MD were least satisfied.
98% of the internal audit participants said they are conducting their
audits in accordance to the correct IA methodology. However, about
60% of them never had an independent external Quality Assurance
Review to confirm their compliance.
64% of the internal audit participants indicated that they do complete
their audit plan. The major reasons why audit plans are not completed
were the lack of resources or unexpected special audits.
44% of the internal audit participants found that the interaction between
the head of the internal audit function and the audit committee chair
before and after an audit was adequate. 30% of them said that they only
meet the audit committee chair once a year.
All internal audit participants felt that their audit plans were risk based.
Once again this is a subjective view, because most of them have not been
subject to external quality reviews.
Half of the participants viewed the internal audit function as creditable.
75% of the participants would not allow IA activity to be discontinued
due to costs cutting initiatives.
70% felt that internal audit had a positive impact and brought about
efficiency, but a massive 77% felt that the IA function saved them less
than 1% of revenue.
49% felt communication between internal audit and those charged with
governance was clear and their expectations were met.
The participants felt that there is good collaboration with other functions,
for instance the risks and compliance function.
The participants clearly understood that the responsibility for risk
management does not lie with the internal audit function.
Less than half of the internal audit function ventured into doing some
form of forensic investigation. What is startling is that only 25% of staff
Minutes of the ACF meeting on 09 October 2014 KPMG Training Centre.doc
2
ABCD
Minutes of the Audit Committee Forum: KPMG
Namibia Internal Survey.
9 October 2014
in the internal audit function have formal forensic qualification, training
or experience.
3.2.2 People
50% of the participants agreed that internal audit had sound
understanding of their business and its strategy.
Only 30% of the participants felt that the head of internal audit had the
necessary gravitas at an executive level. This was cause for concern and
the Institute of Internal Auditors have taken note of this trend in the
industry. They have revisited the audit requirements for Certified
Internal Auditors (CIA). To be a Chief Audit Executive you need to
have post graduate degree and other stringent training requirements.
55% of the internal audit participants felt that they had sufficient
resources to conduct audits.
To the question relating to the interaction and synergy between the head
of internal audit and his/her team, 23% of the participants responded that
the head of internal audit was approachable, 27% responded that they
were supportive, 22% responded that they were commercially minded
and 21% responded that they were quite helpful.
3.2.3 Process
The results showed that the internal audit functions plan their audits
adequately. 11% of the respondents felt that internal audit is not really
aware of the external regulatory environment and critical of risks outside
their business.
The majority of the participants felt that the internal audits are too
finance-driven and concentrate less on operational issues.
Reporting timeliness were identified as a concern. Less than half of the
participants felt that the internal audit was done at the right time. Most
CEO’s didn’t appreciate surprises that come out of Internal Audit reports
and felt that audit findings should be communicated much earlier.
Generally, audit findings were presented in a precise and objective way.
42% of the participants felt that improvement recommended by Internal
Audit resulted in positive changes to the operations.
Some of the main reasons as to why internal audit recommendations
were not implemented included: 1) The findings were not really
meaningful, 2) They didn’t address the core issues. And 3) the
recommendations made good sense, but not real business sense.
3.3
Conclusion:
Minutes of the ACF meeting on 09 October 2014 KPMG Training Centre.doc
3
ABCD
Minutes of the Audit Committee Forum: KPMG
Namibia Internal Survey.
9 October 2014
There are a lot of contradictions within this survey and hopefully a follow
up survey with more participants will be able to clarify this. The results
presented in the survey report are directly from the responses received and
do not reflect KPMG’s view of the state of Internal Audit in Namibia
Printed copies and electronic versions will be distributed to all the
participants, and interested stakeholders.
4
Additional reading material
4.1
Robert Araeb mentioned the additional reading material available in the
pack.
5
Next meeting date
5.1
Thursday, 05 March 2015 at 16:00, KPMG Training Centre.
6
Rest of the meeting dates for 2015
6.1
Thursday, 21 May 2015 at 16:00, KPMG Training Centre.
6.2
Thursday, 13 August 2015 at 16:00, KPMG Training Centre.
6.3
Thursday, 08 October 2015 at 16:00, KPMG Training Centre.
7
Closure
7.1
The meeting was adjourned at 17:00.
List of those present
Harald Müseler (Bidvest)
Albie Basson (Development Bank of Namibia)
Jenny Comalie (First National Bank)
Herbert Maier (Standard Bank of Namibia)
HB Gerdes (Namibia Breweries Limited)
Rolf Peters (Nedbank Namibia Limited)
Gersom Katjimune (Namfisa)
Justin Benade (Windhoek Mechanised Accounting Services cc)
Robert Grant (KPMG Namibia)
Robert Araeb (KPMG Namibia)
Valens Mugabo (KPMG Namibia)
Astrid Jacobi (KPMG Namibia)
Minutes of the ACF meeting on 09 October 2014 KPMG Training Centre.doc
4
ABCD
Minutes of the Audit Committee Forum: KPMG
Namibia Internal Survey.
9 October 2014
Adéle van der Bank (KPMG Namibia)
Minutes of the ACF meeting on 09 October 2014 KPMG Training Centre.doc
5
Enhancing the
auditor’s report
Overview of changes to
the auditor’s report
1
Enhancing the auditor’s report
15 January 2015
New and revised standards
published
Overview
■ Changes to the auditor’s report aim to give users more
insight into the audit
■ New requirements improve transparency and enhance
the nature of communications with stakeholders
■ No change to the current scope of an independent audit
1 January 20161
Effective date (early
application permitted)
Key changes in the auditor’s report
■ Revised descriptions of management and auditor
responsibilities
■ Description of work performed by the auditor on other
information and their findings
31 December 20161
First annual financial
statements in which
amendments are effective
1
■ For listed companies:
– description of key audit matters
– disclosure of engagement partner’s name (already
required in Namibia)
Assumes a 31 December annual reporting date
© 2015 KPMG Inc., a South African company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights
reserved.
Enhancing the auditor’s report
2
Enhancing the auditor’s report
Key audit matters
Those matters that the auditor judged
were of the most significance to the
audit of the current period financial
statements, selected from matters
communicated with those charged with
governance.
Description
■ For each key audit matter, the auditor should
explain:
– why they consider that matter to be one
of most significance; and
– how the matter was addressed
■ Cross reference to disclosures in financials
Those matter that required significant
auditor attention eg areas with
■ Higher assessed risk of material
misstatement or significant risks
■ Significant management judgement,
including high estimation uncertainty
■ Significant events and transactions
during the period
*Specific to the entity*
© 2015 KPMG Inc., a South African company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights
reserved.
■ The auditor should try to avoid providing
original information about the company in the
description of a key audit matter
Bottom line
■ Significant change in auditor reporting for
listed companies
■ Increased interaction with senior
management and those charged with
governance
Enhancing the auditor’s report
3
2
Considerations for audit
committees
Considerations for audit committees
Timing
Oversight role
• Do audit committees support early
adoption of auditor reporting
requirements?
• The auditor will be throwing a
spotlight on certain areas of the
financial statements: how has the
audit committee satisfied
themselves that the highlighted
areas are satisfactory?
• Engage with auditor
Reporting
• How are audit committees telling
users of the financial statements
their side of the story?
Bear in mind the aim:
Greater transparency
• If no mention is made of areas
highlighted as KAMs, will users
(mis)understand AC role?
© 2015 KPMG Inc., a South African company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights
reserved.
Enhancing the auditor’s report
1
1
Considerations for audit committees: Reporting
Amended Code of Corporate Governance: Audit committees required to
report on, inter alia
UK
requirements
•
the significant issues the committee considered in relation to financial
statements, and
•
how these issues were addressed
See extracts of audit committee reports for Rolls Royce, New World Resources,
Kazakhmys
S94(7)(f) of the Companies Act of South Africa: Audit committee’s
report required to
SA
requirements
(current)
Namibia
requirements
(current)
•
describe how the audit committee carried out its functions;
•
state whether the audit committee is satisfied that the auditor was
independent of the company; and
•
commenting in any way the committee considers appropriate on the
financial statements, the accounting practices and the internal financial
control of the company
None
© 2015 KPMG Inc., a South African company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights
reserved.
Enhancing the auditor’s report
2
Considerations for audit committees: Reporting
Best practice
Audit Committee
Forum
King VI
•
Engage with shareholders and stakeholders for areas of interest
•
Look to audit committee reporting in UK as best practice for
reporting
•
Don’t wait for the auditors to start reporting
•
Education for AC members on enhanced auditor reporting and
its purpose
•
Put out guidance on best practice for reporting
•
Opportunity to codify best practice for audit committees
(best practice for directors probably already contained in IFRS)
© 2015 KPMG Inc., a South African company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights
reserved.
Enhancing the auditor’s report
3
2
Questions?
© 2015 KPMG Inc., a South African company and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights
reserved.
Enhancing the auditor’s report
4
3
AUDIT COMMITTEE FORUM
TM
Alert 18
On the 2015 Audit Committee Agenda
Issue Date: January 2015
acf.co.za
Audit Committee ForumTM is proudly Sponsored by KPMG
The information contained in Alerts disseminated by the
Audit Committee ForumTM is of a general nature and is not
intended to address the circumstances of any particular
individual or entity. The views and opinions of the forum do
not necessarily represent the views and opinions of KPMG,
the Institute of Directors and/or individual members.
Although every endeavour is made to provide accurate and
timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it
will continue to be accurate in the future. No reliance should
be placed on these Alerts, nor should any action be taken
without first obtaining appropriate professional advice. The
Audit Committee ForumTM shall not be liable for any loss or
damage, whether direct, indirect consequential or otherwise
which may be suffered, arising from any cause in connection
with anything done or not done pursuant to the information
presented herein. Copyright by the Audit Committee
ForumTM, extracts of this paper may be reproduced with
acknowledgement to the Audit committee ForumTM.
Contents
Maintain (or regain) control of the committee’s agenda.
Stay apprised of global audit reform initiatives – potentially impacting
the external auditor’s role and relationship.
Monitor fair value estimates, impairments, and judgments of key
assumptions underlying critical accounting estimates.
Consider whether the financial statements and other disclosures tell
the company’s story – and the audit committee’s.
Understand the company’s domestic and international tax positions,
and the (very real) implications for the brand.
Understand the implications of the new revenue recognition standard
and other accounting changes on the horizon.
Make the most of the audit committee’s time together: effectiveness
requires efficiency.
Quality financial reporting starts with the CFO and finance organisation;
maintain a sharp focus on leadership and bench strength.
Make sure the company’s ethics and compliance programs are keeping
up with new vulnerabilities to fraud and misconduct.
Position internal audit to be an indispensable resource.
1
Audit Committee ForumTM Alert 18
Prioritising a heavy audit
committee workload is never
easy, and 2015 will continue
to be challenging given
developments in the global
risk, regulatory, and political
environments. Drawing on
insights from the latest Audit
Committee Institute’s Global
Audit Committee Survey
and interactions with audit
committees and business
leaders over the past 12
months,10 things have been
flagged that audit committees
should keep in mind as they
consider and carry out their
2015 agendas.
Audit Committee ForumTM Alert 18
Maintain (or regain) control of the committee’s agenda.
Half of the 1,500 audit committee members surveyed
recently said it’s “increasingly difficult” to oversee the
major risks on the audit committee’s agenda in addition
to its core responsibilities (financial reporting and related
internal controls, and oversight of internal and external
auditors). Take time to reassess whether the committee
has the time and expertise to oversee other major risks –
e.g., cyber security and IT risks, supply chain and other
operational risks, and legal and regulatory compliance.
Does cyber risk require more attention at the full board
level? Given the challenges posed by global economic
conditions and geopolitical risks as well as new
competitors and technologies, the risk of mission creep
is expected to be high in 2015. Keeping the audit
committee’s agenda focused – and its eye on the ball –
will require discipline and vigilance.
Stay apprised of global audit reform initiatives –
potentially impacting the external auditor’s role and relationship.
Regulators in the EU and other countries around the
world have undertaken initiatives focused on enhancing
auditor independence, objectivity, and professional
skepticism – from changes to the auditor’s reporting
model, to auditor tenure and rotation, and restrictions on
non-audit services. Stay apprised of these initiatives and
consider how they would impact the audit process, the
audit committee’s oversight, and the company. For
example, expanding the auditor’s report – to include
discussion of key audit risks and the related audit
response, and evaluating information outside of the
financial statements – would impact your company
because it will be included in your company’s financial
statements. Discuss the implications of these initiatives,
and take the lead on ensuring audit quality: Set the tone
and clear expectations for the external auditor, and
actively monitor auditor performance through frequent,
quality communications (formal and informal).
Monitor fair value estimates, impairments, and judgments of key
assumptions underlying critical accounting estimates.
A company’s greatest financial reporting risks are
often in those areas where there’s a range of possible
outcomes and management has to make difficult
judgments and estimates – fair value measurement,
impairment, revenue recognition, etc. Over the past
year, regulators have stepped-up their efforts on a
number of fronts to help ensure that significant
accounting judgments and estimates applied by
management present a fair and accurate picture of
the company’s financial position and performance.
The message: Quality financial reporting requires a
disciplined, robust, and unbiased process to develop
accounting judgments and estimates. To that end,
understand management’s framework, make sure
that management has appropriate controls in place,
and ask for the external auditor’s views.
2
3
Audit Committee ForumTM Alert 18
Consider whether the financial statements and other disclosures tell
the company’s story – and the audit committee’s.
Investors want to understand the company’s story;
consider how the company’s disclosures – and the audit
committee’s – can be improved to better tell it. Think
about going beyond what’s required to provide a clear
picture not only of the company’s recent performance,
but where it’s headed and the key risks it faces. In
addition to traditional financial metrics, can the company
provide investors with greater insight into the drivers of
long-term growth – customer satisfaction, talent,
innovation? Consider the recommendations of the
Financial Reporting Council (FRC) Reporting Lab and the
Audit Committee Collaboration Group (which includes
the NACD and the Center for Audit Quality) on ways to
enhance the audit committee’s reporting. Given the
audit committee’s critical oversight role, “it is important
for investors and others with a stake in the financial
markets to understand and have confidence in the
committee’s work.”
Understand the company’s domestic and international tax positions,
and the (very real) implications for the brand.
Pay particular attention to the global “tax transparency
and morality” debate being driven by notions of
“fairness” and “morality,” and consider the impact of
tax risk on the company’s reputation. Tax is no longer
simply an expense to be managed; it now involves
fundamental changes in attitudes and approaches to
tax globally. Ensure that tax decisions take into
account reputational risks and not simply whether
the company has technically complied with tax laws.
Monitor OECD and governmental efforts globally to
address perceived transfer pricing abuses. Help shape
the company’s tax risk appetite, and establish a clear
communications protocol for the chief tax officer to
update the audit committee regularly. Help ensure the
adequacy of the company’s tax resources and
expertise globally.
Understand the implications of the new revenue recognition
standard and other accounting changes on the horizon.
In May, the IASB and the FASB finalised a converged,
principles- based standard on revenue recognition that
will change the way many companies recognise revenue.
The standard isn’t effective until January 1, 2017 for
calendar year-end companies (and the IASB and the
FASB are assessing whether to delay the implementation
date), but it will have a significant impact across the
company – from systems, data, and accounting
processes, to controls and business contracting
processes. Companies should already be developing
transition plans and identifying areas that require close
attention. Also, stay apprised of other standard-setter
projects – such as leases, financial instruments, and
insurance – which have significant implications not only
for the company’s financial reporting and accounting,
but for staffing, resources, and IT systems.
Make the most of the audit committee’s time together:
effectiveness requires efficiency.
As we noted in #1, keeping the audit committee’s
agenda focused on financial reporting and related
internal control risk is essential to the committee’s
effectiveness – but meeting the workload challenge
requires efficiency as well. Streamline committee
meetings by insisting on quality pre-meeting materials
(and expect pre-read materials to have been read),
making use of consent agendas, and reaching a level
of comfort with management and auditors so that
financial reporting and compliance activities can be
addressed efficiently (freeing-up time for more
substantive issues facing the business). Do we
leverage the array of resources and perspectives
necessary to support the committee’s work? Do we
spread the workload among audit committee
members, rather than relying on the audit committee
chair to shoulder most of the work? Do we spend time
with management and the auditors outside of the
boardroom to get a fuller picture of the issues? Take a
hard, honest look at the committee’s composition,
independence, and leadership. Is there a need for a
fresh set of eyes? Is it time for rotation?
Audit Committee ForumTM Alert 18
Quality financial reporting starts with the CFO and finance organisation;
maintain a sharp focus on leadership and bench strength.
Nearly 60 percent of the directors surveyed globally said
their company does not have a formal succession plan
for the CFO. Not good. Given the critical role the CFO
plays in maintaining financial reporting quality – and the
high rate of CFO turnover – the company should have a
succession plan in place for the CFO (and other key
finance executives – the controller, chief accountant,
chief audit executive, treasurer, and perhaps the chief
compliance and chief risk officers). How does the audit
committee assess the finance organisation’s talent
pipeline? Do they have the training and resources they
need to succeed? How are they incentivised to stay
focused on the company’s long-term performance?
What are the internal and external auditors’ views?
Make sure the company’s ethics and compliance programs are
keeping up with new vulnerabilities to fraud and misconduct.
Globalisation, information technology, and fast-changing
business models have, in many ways, created a Wild
West: Moving quickly to capitalise on opportunities in
new markets, leveraging new technologies and data, and
engaging with more vendors and third parties across
longer and increasingly complex supply chains heighten
the risk of fraud and corruption. Coupled with the
complex global regulatory environment – FCPA and the
UK Bribery Act, the SEC’s whistleblower program, and
the sheer volume and scope of new regulations – these
vulnerabilities will require vigilance. Help ensure that
the company’s regulatory compliance and monitoring
programs cover all vendors in the global supply chain and
clearly communicate the company’s expectations for high
ethical standards. Recognise that the radical transparency
enabled by Twitter, YouTube, Facebook, and other social
media has effectively put every company in a fishbowl:
the company’s culture and values, commitment to
integrity and legal compliance, and its brand reputation
are on display as never before.
Position internal audit to be an indispensable resource.
At a time when audit committees are wrestling with
heavy agendas – and issues like cyber security and
global compliance are putting risk management to the
test – internal audit should be a crucial voice on risk
and control matters. (One out of every two audit
committee members surveyed said internal audit
“should be delivering greater value to the
organisation.”) That means focusing not just on
financial reporting and compliance risks, but critical
risks to the business – key operational and technology
risks, and related controls. Does internal audit have the
stature – and a direct line to the audit committee –
to ensure that its voice is heard and valued? Leverage
internal audit as a barometer of the company’s
financial and operational health – helping the audit
committee understand the quality of financial and
operational controls, processes, and people. “Highperforming departments stand apart in their mindset
and how they approach their work,” says IIA’s CEO
Richard Chambers. “They grasp the importance of
delivering value, and they are seen by stakeholders
as an indispensable resource.”
4
Contact us
KPMG Department of Professional Practice
Thingle Pather
Director
T: +27 (0)83 704 0064
E: [email protected]
Samantha Habib
Manager
T: +27 (0)82 718 9166
E: [email protected]
acf.co.za
AUDIT COMMITTEE FORUM
TM
Alert 19
On the 2015 Board Agenda
Issue Date: January 2015
acf.co.za
Audit Committee ForumTM is proudly Sponsored by KPMG
The information contained in Alerts disseminated by the
Audit Committee ForumTM is of a general nature and is not
intended to address the circumstances of any particular
individual or entity. The views and opinions of the forum do
not necessarily represent the views and opinions of KPMG,
the Institute of Directors and/or individual members.
Although every endeavour is made to provide accurate and
timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it
will continue to be accurate in the future. No reliance should
be placed on these Alerts, nor should any action be taken
without first obtaining appropriate professional advice. The
Audit Committee ForumTM shall not be liable for any loss or
damage, whether direct, indirect consequential or otherwise
which may be suffered, arising from any cause in connection
with anything done or not done pursuant to the information
presented herein. Copyright by the Audit Committee
ForumTM, extracts of this paper may be reproduced with
acknowledgement to the Audit committee ForumTM.
Contents
Focus on the company’s plans to grow
and innovate.
2
Reassess the board’s role in strategy.
2
Consider whether the board needs
to recalibrate how its committees
communicate and coordinate on risk
oversight.
2
Reassess the company’s vulnerability to
business interruption, and its crisis readiness.
3
Sharpen the board’s focus on cyber risk
and security.
3
Do we have the right people on the board?
3
Set the tone and closely monitor
leadership’s commitment to that tone,
as well as the culture throughout the
organization.
4
Promote engagement with shareholders,
and prepare for activists.
4
1
Audit Committee ForumTM Alert 19
The challenges for companies
and their boards in 2015 are
expected to be intense, with a
volatile economic and geopolitical
landscape, the accelerating
speed of technology change, and
competitive disruption topping the
list. The spotlight on corporate
directors continues to intensify as
regulators and investors (including
activists) scrutinize the board’s
contribution to strategy, risk, and
compliance. Drawing on insights
from the KPMG network’s
interactions with directors and
business leaders over the past 12
months, eight flags have emerged
that boards should keep in mind
as they consider and carry out
their 2015 agendas.
Audit Committee ForumTM Alert 19
2
Focus on the company’s plans to grow and innovate.
The “new normal” of low growth will likely continue to
challenge companies in 2015 – particularly with many western
economies struggling to avoid deep recession, slowing growth
in Asia, and a long list of geopolitical hotspots and uncertainties.
The growth conundrum is a particular challenge for this
generation of business leaders who, having gone through
the financial crisis, are inclined to be more risk averse. In this
environment, boards have a critical role to play in helping
the company not only avoid missteps, but also take smart
risks to grow, innovate, and stay competitive. What kinds of
discussions is the board having about growth opportunities?
How do we ensure that the company’s culture and processes
create the right environment for growth through innovation?
How do we measure and reward innovation success? Are we
tapping into emerging markets? (The economic momentum
in emerging markets has slowed, but the growth story isn’t
over; and each country presents its own set of risks and
opportunities with different growth prospects and business
climates.) Do we have – in the words of Eurasia Group’s Ian
Bremmer – a “worldview of the world” and how that might
impact the company’s strategy and growth plans?
Reassess the board’s role in strategy.
The complex, volatile, and uncertain business environment
today has made the “annual review and concur” model of
the board’s oversight of strategy obsolete. Globalization,
new technologies, upstart competitors, and all the “whatifs” looming around the bend require a frank reassessment
of the board’s role in strategy. An NACD report (released
in October) proposes a framework for deeper board
engagement in strategy – from formulation, monitoring
execution, and testing the continuing validity of assumptions,
to recalibrating strategy throughout the year – and advocates
for changing the “strategic rhythm” of the board. Use the
report to benchmark your board’s role in strategy and assess
the need for greater engagement. It’s a quick read, with
recommendations you can put into practice.
Consider whether the board needs to recalibrate how its committees
communicate and coordinate on risk oversight.
Despite the clear benefits of board committees (including
increased focus on key risks), a complex committee
structure poses its own risk of fragmented or balkanized
board oversight. Do we have the right committee structure
to oversee the major risks facing the business? Are risk
responsibilities clear? Does the audit committee have too
much on its plate? How do we communicate and coordinate
the oversight activities of standing committees? Consider
overlapping committee memberships, particularly when
inter-committee coordination is of strategic importance. Are
committee chairs communicating regularly to make sure they
understand what’s going on in the other committees? Are
committee reports to the board robust, or perfunctory?
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Audit Committee ForumTM Alert 19
Reassess the company’s vulnerability to business interruption,
and its crisis readiness.
As illustrated by recent geopolitical turmoil, financial
crises, natural disasters, and pandemics, the global
interconnectedness of businesses, markets, and risk
poses challenges for virtually every company. Ensure that
management is weighing a broad spectrum of what-if
scenarios – from supply chain links and the financial health
of vendors to geopolitical risks and cyber threats. Is the
company’s crisis response plan robust and ready to go? Is
the plan actively war-gamed and updated as needed? Does it
take into account the potential failure of critical infrastructure
– e.g., telecommunications networks, financial systems,
transportation, and energy supplies?
Sharpen the board’s focus on cyber risk and security.
Increasing threats to corporate information systems and
intellectual property – as well as compliance risks, the
potential for lawsuits, reputational damage, and loss of
customers – have elevated cybersecurity to the board
level and as a critical business priority (where it should be).
Regulators worldwide have sharpened their scrutiny of
companies’ data security efforts, as well as disclosures and
communications about cybersecurity risks and breaches.
Ensuring the adequacy of a company’s cyber defenses needs
to be a critical aspect of risk management and oversight. Is
cybersecurity risk given regular and adequate time on the
board’s agenda? What are our biggest vulnerabilities and
our most critical data sets? What are the results of our most
recent penetration tests and external assessments of our
cyber defences? Do we have a cybersecurity scorecard and
a cyber-incident response plan? Help elevate the company’s
cyber risk mindset to an enterprise level, encompassing key
business leaders (CEO, CIO, CFO, General Counsel, CRO, HR,
etc.) and business decisions – from new product development
to acquisitions and expansion into new geographies.
Do we have the right people on the board?
Is the board asking itself whether it has the right mix of skills,
backgrounds, experiences, and diversity? Shareholders are:
Activists are questioning whether long-tenured boards are
keeping pace with the broad array of challenges facing their
businesses. Governance experts are also weighing-in: As
Ann C. Mulé and Charles Elson note,1 “What boards need
are industry-expert, independent directors.” In its studies
on diversity gaps,2 Egon Zehnder observes that “companies
with global aspirations require boards with global capability,”
and that “the real purpose of increasing gender diversity
is not simply to increase the number of women on the
board, but to find exceptional directors who can help take
the organization to the highest level of performance.” In
short, lack of diversity can hamper the board’s performance
– and the company’s. Have we squarely addressed the
composition of our board – including gaps and obvious
shortcomings in director performance –
to ensure that we have the right mix to provide strategic
direction and effective oversight of the company?
Audit Committee ForumTM Alert 19
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Set the tone and closely monitor leadership’s commitment to that tone, as
well as the culture throughout the organization.
The year ahead will likely be one of tremendous pressure and
change – and a good measure of complexity and uncertainty.
In this environment, it is more important than ever to be
acutely sensitive to the tone from (and example set by)
leadership, and to reinforce the culture of the organization,
i.e., what the company does, how it does it, and the culture
of compliance and moral propriety. Is the board hearing
views from those below senior management and outside
the company? Are there dissenting views? Recognize when
asymmetric risk – the over-reliance on senior management’s
information and perspective – is too high. Make time to visit
company facilities and attend employee functions.The tone
and culture throughout the company’s global operations
and the extended organization is critical. How confident
is the board that it has a good sense of the culture in the
company’s global operations – far away from headquarters?
Do the company’s compensation policies and practices
send the right message about accountability and long-term
performance?”
Promote engagement with shareholders, and prepare for activists.
In the recent Audit Committee Institute’s Global Audit
Committee Survey, some 60 percent of respondents said
that, as a result of the activist environment, their company
has increased its level of engagement with shareholders –
but 40 percent have not. Shareholder activism continues to
be on the rise, as is the pressure on boards and management
teams to engage with these investors. In a speech on
December 3, 2013 in Washington, D.C., SEC Chair Mary Jo
White said the “landscape has unquestionably changed,”
and that “there is widespread acceptance of many of the
policy changes that so-called ‘activists’ are seeking to effect.”
1
2
She emphasized the importance of proactive outreach to
shareholders – “honest communications about how and
why decisions are being made” – and said that “the board of
directors is – or ought to be – a central player in shareholder
engagement.” Do we understand the activists’ agenda?
Have we conducted a vulnerability assessment? Do we
know and engage with our largest shareholders, and
understand their priorities? Executive compensation,
management performance, strategy, separating unrelated
businesses, capital allocation, and board composition are
likely on their radar.
“A New Kind of Captured Board,” Directors & Boards, First Quarter 2014
Egon Zehnder, 2014 Global Board Index and Gender Diversity on Boards: Breaking the Impasse
Contact us
KPMG Department of Professional Practice
Thingle Pather
Director
T: +27 (0)83 704 0064
E: [email protected]
Samantha Habib
Manager
T: +27 (0)82 718 9166
E: [email protected]
acf.co.za
acf.co.za