So, what are the crucial aspects of a highly effective audit committee? This is a very important question to answer if you work in the field of fraud investigation and forensic accounting.
According to Cynthia Fornelli, Executive Director of the Center for Audit Quality (CAQ), “having a board and an audit committee that is willing to ask the tough questions, that’s willing to follow up and that’s willing to really dig deeper into the organization be it working with the CFO and the CEO” are essential keys to effectiveness. “A willingness to probe and be skeptical about what they’re hearing alongside a need to trust that they have the best people in place even though everything that they’re being told still needs be verified.”
Through talks with many of the stakeholders in the supply chain, Fornelli emphasizes the importance of communication and having venues outside of the formal audit committee process where “they can pick up the phone and talk to the internal and external auditors, find out what’s on their mind, what are they seeing across the industry or the segment of that particular company’s line of business.” Having this “constant” communication seems to be another key point as does having a probing mind.
The best audit committees make sure that they have time to probe. “So often in the audit committee process there is almost a checklist that you have to go through and make sure that you are looking at all your responsibilities, all your oversight responsibilities and it leaves very little time for open ended questions, an open dialogue that’s not somehow been scripted out of the agenda.” Leaving 10 minutes at the end of a meeting for open dialogue and to ask open-ended general questions to explore certain issues can thus really reap rewards.
Looking to internal audit staff is another key factor that Fornelli cites. “On your internal audit rosters you may very well have certified fraud examiners and so getting that resource, getting that experience” can be highly beneficial. “One of the things that we’ve heard from audit committees is that it’s hard to have the breadth of experience that somebody like a certified fraud examiner might have. So having the time to ask internal audit and external audit what have you seen, what is unique about our company that might lead us down a fraud path or what have you seen in our company that you’ve seen elsewhere, where are our weaknesses and just having that dialogue is a critical question I think an audit committee should be asking.”
Fornelli goes on to explain the single most important thing to tell an audit committee member would be to “ask that follow-up question, never be afraid of that last question because often times that’s where you’ll find not necessarily fraud but behavior that ultimately down the road can lead to fraud. Ideally we’d like to stop fraud before it even starts and it’s my view that very few people start out saying “I’m going to commit fraud today.” Instead they take a series of steps for a whole host of various reasons that down the line could lead to and turn into fraudulent behavior.”
If an audit committee can ask questions that get people thinking about fraud and its associated human behaviours, then this may very well prevent those actions or those steps that ultimately could lead to fraud within an organization. Good communication, like in every part of a business seems to be the underlying foundation for creating a committees overall effectiveness
Notes：This essay is excerpted from ACFE website.