The Relationship between the CFO and the Audit Committee: Keys to Success
The relationship between the Chief Financial Officer (CFO) and the audit committee in today’s environment continues to evolve from what was previously a primarily financial role to that of a strategic catalyst and vital source of information for the company and the board.
There are five attributes and seven non-negotiables that today’s CFO must have to establish and maintain successful relationship with the audit committee. These attributes and non-negotiables are from my own observations culled over the course of my 30-year career spanning domestic and international, public and private entities.
The five attributes are:
The seven non-negotiable elements that are foundational to a successful relationship between a CFO and the audit committee are adapted from an article in The Wall Street Journal by Ajit Kambil, titled “The CFO and the Audit Committee: Building an Effective Relationship.” They are summarized below:
- Ensure there are “no” surprises:Audit committees do not welcome any surprises. Or, if surprises occur, the audit committee will want to be apprised of the issue Surprises may be inevitable, but the board’s audit committee expects CFOs to take precautions against known issues, manage the avoidable issues, and to inform them very early on when something unexpected occurs. It is important for the CFO and the audit committee chair — perhaps even some of the other board members — to set a regular cadence of meetings, so that they have a relationship and a context within which to work together when challenging issues arise. Don’t leave these meetings to chance. If the audit committee chair, committee members, or senior management are hearing about something of significance for the first time in a meeting, that’s problematic.
- Establish a strong partnership with the CEO and other leaders: Audit committees want to see the CFO as an effective partner with the CEO, as well as with their peer executives. A key for the CFO is to proactively manage CEO and peer relations, especially if there are challenging issues that may be brought up to the board. In that case, the CFO should be prepared to take a clear position on what the board needs to hear from management.
- Maintain confidence in finance organization talent: Audit committees want visibility into the finance organization to ensure that it has the appropriate skills and experience. They also are looking to ensure long term stability of the finance organization including active talent development and solid succession planning. CFOs might consider approaching these goals in several ways. One way is to provide key finance team members with an opportunity to brief the audit committee on a special topic, for example, a significant accounting policy, a special analysis or another topic that’s on the board agenda.
- Exhibit command of key accounting, finance and business issues: Audit committees want CFOs to be well-versed with respect to the key accounting issues that might be facing the organization, and given that many CFOs are not CPAs, such command is even more critical for the CFO to demonstrate. The CFO should schedule deep dive meetings with management, the independent auditor, the chief accounting officer, and others to receive briefings in order to better understand the organization’s critical issues from an accounting perspective, as well as to get trained up on those issues. In addition, CFOs should demonstrate a deep understanding of the business issues that the organization is confronting. There again, CFOs can leverage both internal and external resources to help them master these issues. Industry briefings are also important, particularly for CFOs who are new to an industry.
- Offer insightful forecasting and earnings guidance: Audit committees expect CFOs to not only deliver reliable forecasts, but also to articulate the underlying drivers of the company’s future performance, as well as how those drivers might impact outcomes. As audit committee members read earnings releases and other information in the public domain, they tend to focus on whether the information merely meets the letter of the law in terms of disclosures, or does it tell investors what they need to know to make informed decisions. This is where an outside-in view from audit committee members can bring significant value to the CFO and to the organization.
- Understand effective risk management: CFOs are increasingly held accountable for risk management, even when there is a chief risk officer. Further, audit committees want CFOs to provide leadership not only on traditional financial accounting and compliance risk matters, but also on some of the enterprise operational macro-risk issues and to show how that might impact the financial statement. It is important for CFOs to set the tone at the top for compliance and ethics, oversee the control environment and ensure that from a compensation perspective, the appropriate incentives and structures are in place to mitigate risk. A key to the CFO’s effectiveness at this level is to find time to have strategic risk conversations at the highest level of management, as well as with the board.
- Deliver clear and concise stakeholder communications: Audit committees expect effective communication between the CFO and key stakeholders, which extend beyond the board and the audit committees. They want CFOs who can articulate the story behind the numbers and provide insights and future trends around the business, and to effectively communicate to the Street. CFOs can expect board members to listen to earnings calls and to observe how they interact with the CEOs, demonstrate mastery of the company’s financial and business issues, and communicate those to the Street.
A CFO who is mindful of these traits and expectations will experience success in managing the relationship with the audit committee.