The financial integrity of a company often lies in the hands of an independent board of directors known as the audit committee. As chief financial officers, it is important to know your role when it comes to dealing with this committee, writes Vodacom CFO Raisibe Morathi.
Audit committees are critical to businesses, and they are also an important part of your career as a CFO. During audit committee meetings, you want everything to go smoothly, so it is understandable that these times can be stressful.
Audit committees cover a wide range of responsibilities, including financial reporting, internal control, risk management and governance. They also oversee the corporate risk management frameworks, including compliance, technology and cyber risks.
In a large and listed company where some of these topics may be covered by separate board committees other than the audit committee, collaboration is still necessary, as these risks may impact financial performance and reporting. This is precisely why the CFO’s role in the audit committee is critical. It can either be your place to shine or bury your career.
Below, I’ve outlined some of the things that a CFO must always take into consideration in order to make the audit committee effective for themselves and their company.
1. Your relationship with audit committee members
It is crucial to build a healthy and professional relationship with members of the audit committee. These individuals likely have extensive experience as former CEOs, CFOs or custodians of finances, and they also serve on other board committees besides your audit committee. It is essential to leverage their experience to learn and grow.
Company law in most jurisdictions prescribes that the audit committee members are independent non-executive members of the board. Therefore, from the onset, these are individuals you have the least knowledge of in terms of ways of work and business understanding. They also do not know enough about you, your background or your capabilities. Therefore, the effort to build a relationship must come from you as the CFO.
When seeking to build relationships, keep in mind that during the audit committee meetings there’s limited time and a lot to cover in that finite time. Therefore, the day and time of the audit committee meeting isn’t the ideal day to socialise with the members. You have to set aside time outside of the audit committee meeting to build and maintain relationships with colleagues.
2. Risk mindset without losing sight of opportunities
CFOs have to challenge themselves to have a commercial aptitude, not just a conservative custodian of financial risk. By the time you become a CFO of a sizable business, you have likely been out of university for at least a decade. Therefore, your technical knowledge is strongly built on practical experience, not the textbook approach.
CFOs constantly deal with a lot of technical matters, ranging from technology, tax and accounting rules to stock exchange requirements, a variety of laws, and various other matters that require sound judgement. Among these experiences, you must be conscious to spot the risks and opportunities for your business.
For those who were CFOs during the Covid-19 pandemic, you may recall multi-layered challenges such as rapid changes in supply chain, reduced spending due to lockdowns, changing consumer patterns, acceleration in digital business processes as well as rapid and sharp increases in interest rates. These risks occurred all in one short period therefore most businesses faced a variety of challenges. CFOs needed to stay focused on preserving revenues, cutting costs and safeguarding the business for survival.
The Covid-19 pandemic illustrated that in recent times, black swan events are aplenty, and CFOs must be mindful of what this means for their business. Even where one observes a low-risk matter today, the ability to assess whether it may become a much bigger risk tomorrow is important. Think about how various businesses have had to change their operating models and strategies due to the Covid-19 pandemic.
CFOs had to very quickly figure out where to draw financial capacity to enable the shifts required in the business. Being a CFO who does not let a crisis go to waste and being able to leverage chances during Covid-19 became a true test of business triumphs and failures.
To manage the risks and spot opportunities, it is imperative to be truthful and regularly assess the technical capability supporting you as the CFO. We live in times where multiple crises are possible, therefore, you must apply technical assessment thoroughly and layer it with good judgement. When you get to the audit committee, you should be analysing the issues with this in mind. The audit committee members will need to know that you have thought about every likelihood.
3. Communication in all forms
It may be true that bean counters are so tight on numbers that they lack things like communication skills. As CFOs, you need to pay specific attention to this.
In the modern day, the beans you ought to have been counting are counted through quantum computing. While CFOs have been historically known to stay very close to their calculators, times have changed and there is less expectation from CFOs to be validating numbers. Instead, CFOs are required to analyse trends by comparing data against various time periods, benchmarking to identify anomalies, and normalising for more helpful interpretation. You need to stress test findings and communicate succinctly what the problems and opportunities are and what recommendations you have for the business.
For example, when analysing detailed sales data, if you observe that sales peak during the last two hours on Fridays, you might propose that business hours be extended on Fridays, therefore run a business case to evaluate whether the increased demand for the product justifies the additional operating hours and associated costs.
You need to regularly communicate business performance to the CEO, executive committee (exco), and to the board of directors. You also need to train yourself to acknowledge good outcomes and pause to congratulate the performers. Then be clear and firm on areas that need attention, making sure that you avoid jargon to ensure that even stakeholders outside of the finance realm (e.g., the operations team) understand what is required of them. Clear and concise communication is imperative.
When communicating widely, e.g., with the audit committee, shareholders and regulators, it is crucial to recognise that they may not be intimately familiar with your business or its internal jargon. For instance, if you delve into the meaning of a “CA” note, it could refer to “current assets,” “capital allowance,” or even a region like “Central Africa/America.” Failing to consider this might lead to losing the audience’s attention. They may choose to politely nod and disengage rather than ask for clarification.
Lastly, as a CFO, it is essential for you to be able to skilfully convey complex technical issues in a meaningful way. When dealing with significant provisions, you must be able to explain both the business implications of what went wrong as well as the technical reasons behind the chosen approach. Keep in mind that shareholders are often more focused on the bottom line than the audit committee, which is concerned with the fuller context. Therefore, be mindful of who the audience is when you communicate.
Effective communication is an everyday skill that involves what you say, and how you say it. If your company relies on PowerPoint presentations, ensure that your slides reflect clear visuals and professional wording in a logical sequence. When drafting detailed reports, ensure clarity by explaining the context, the problem-solving steps, and the recommended course of action.
Avoid leaving the audit committee guessing about your needs, and always provide a conclusion or recommendation in your documents. As an observation, PowerPoint is not the best way of explaining a technical matter for the audit committee whereby your structure must be (a) stating the problem statement (b) giving accounting, tax and regulatory and other technical assessment (c) business implications on revenue and/or net profit (d) your conclusion or recommendation (e) clarity of whether this is for discussion/approval/notification. Trying to do this on PowerPoint will either imply a very wordy and cluttered presentation, which is not easy to read, or may even have a great deal of critical information missing. To this end, I strongly recommend that you write a board note in Word, immersed with tables so that the message is clear.
4. Audit committee is the ultimate G in ESG
Good governance is the ultimate test for an effective audit committee. The role of CFO can be demanding, and varies depending on the industry you are in, systems being used and the financial metrics, which can obscure the broader perspective. While key figures like sales, revenue and EBITDA are consistently important, others, such as bad debts, may only be significant in context. The audit committee’s focus should not be on the minute details of how specific numbers and ratios are derived, but rather on having a qualified and competent CFO who is supported by a skilled team that can efficiently use systems and processes.
Confidence in the origin and reporting of financial details is crucial, as this ensures insights are based on a single, reliable source of truth. If there is a good governance setting, the audit committee will take great comfort in knowing that EBITDA and others are produced from solid and structured foundations. The CFO must constantly be an example of such good governance in the way they engage with the audit committee. Illustrating the point, you need to limit surprises and indicate that each decision and judgement taken by management is based on a technically sound basis and approved at the right level in the business.
For large companies with multiple consolidations, the audit committee will want assurance that the standards set at group level are maintained across all subsidiaries and operations: this illustrates governance that is entrenched across the group. Equally, it provides assurance that the CFO and finance teams can uphold the integrity of budgets, performance and investment business cases.
When requesting capex, it is essential that the audit committee is confident that the business case justifies the required expenditure and is approved by management. During an AGM, the chair of the audit committee sits side-by-side with the CFO, CEO, and chair of the board, because shareholders may seek clarification on the reported numbers and or seek additional context on some of the resolutions to be passed.
The governance that ensures that everything adheres to the acceptable standards is provided by the audit committee’s approval of the CFO’s report. Should any adverse issues arise, the responsibility does not fall on the audit committee, but rather, the buck stops with the CFO to address and correct, as necessary.
5. External and internal auditors
As the CFO, reading the internal audit findings and external audit management letter is never an easy time. It is a natural friction point because you might have invested in business processes and controls, therefore expecting that things are as smooth as water flowing through a clean pipe. The audit findings, if material, could imply errors or unmitigated risks in the financial performance.
It is therefore in your interest as the CFO to ensure that any such findings result in a firm action to address the control deficiencies. Remember that repeat findings could give the audit committee and your board an impression that your controls environment is not robust, which is not the image you want to build. It is an issue of whether the processes are fit for purpose (comprehensive without being complex) to support the business, and agile to support business activities as things evolve. As a CFO, any findings from the auditors impacts you irrespective of where the problem originated from.
One of the most common control failures raised by both internal and external auditors is access controls. You may say that this is IT’s problem, however, visualise a scenario where segregation of duties is breached, fraud occurs as a result of unauthorised access or a scenario where systems errors occur. All of these will result in a knock on the door of the CFO’s office, and you will find that fixing such a problem is inevitably more costly than getting it right the first time.
The audit committee meetings always include auditors in attendance and often what they report on may not always result in a round of applause for you. On the bright side, they are your gatekeepers, therefore remain alert to the issues that they raise, and strive to be a stronger campaigner to marshal business to address the issues raised.
Your duty is to assure the audit committee that the audit findings will be addressed. You should not be hearing about the findings for the first time at the committee meeting but need to have spoken to the auditors or read their draft report and given your inputs beforehand. In that case, when the audit committee absorbs the unwelcome news of the audit findings, you are also able to give context and guidance on how the risks/control failures will be mitigated.
The audit committee needs to know that you and the auditors are working well together. A conflict between the CFO and the auditors is detrimental to the business. In such situations it is more likely that the CFO, rather than the auditors, is not demonstrating a sufficient level of EQ. If the audit committee continues to observe unhealthy relations, a ceasefire will need to be called, which may mean the CFO may need to step down.
6. Chief fortify officer
You have a duty to fortify the business against future risks. The reported historical performance sets the context, but what really matters is the business sustainability in the future. This is why the audit committee will be keen to discuss budgets, rolling forecasts, quality of earnings, balance sheet qualities and capital allocation. These are things that the CFO needs to do to ensure that the business is always fortified.
As CFO, you need to earn your trust and get to a place where everyone around you knows they can sleep well at night with you at the helm. Closest scrutiny will come from the audit committee as it is their job to take a temperature check of the presence of “fortify” in your qualities. As CFO, you are therefore expected to have a good enough understanding of the risks in the business. When the audit committee and the board discuss various other topics, they are expecting that the CFO’s knowledge and scope is not narrowed to financial data. The more the CFO is alive to other topics and can participate appropriately, the more confidence emerges that the business is safe. Note that the CEO may be inclined to take more risks and face the pressure to compromise on controls to drive business performance. The actions by the CEO can undermine the fortification of the business, however such a CEO also sleeps well when they know that their CFO is on watch to ensure that they do not go overboard. The CEO also relies on you as the CFO to be the gatekeeper for the business, regardless of whether you challenge his decisions or not.
7. Trusted business partner in the exco team
The audit committee and the board take note of the effectiveness of the relationships between the CEO and the CFO, and among the executive committee (exco). When exco keep cross-referencing each other, illustrating collaboration and co-ownership of the business problems, it brings them great comfort.
When things go wrong, you as the CFO cannot afford to sweep things under the carpet. Rather ask yourself, how do you ensure that the head of operations, HR, marketing or IT see you as a partner when you constantly challenge them for budgets and performance? The magic is that we all need to learn by providing constructive feedback.
If your answer is just ‘no’, that is not helpful. Instead, you could say, “Let’s consider an alternative,” or, “Can we do this in another period?” or even, “Can we do a trade-off between this and that?” It will not go well if the operations team were to state that they did not do maintenance because the CFO did not allocate budget.
The audit committee must be given exposure to other finance specialists and to operational teams who deliver against set goals and targets: this allows them an opportunity to observe the effectiveness of the relationships amongst exco. They need to see the heads of risk, compliance, IT, and, of course, the CEO, to ensure that everyone is working in harmony, like a choir singing in sync.
The most critical part of your role as a trusted business partner to the CEO is about being able to partner in fixing the business problems and championing business opportunities. If you do not speak to the CEO regularly, the partnership will not be as effective. The audit committee can pick up a material risk by just observing the relationship between CEO and CFO, e.g., where they have a contrasting view on a material topic. The observations are as close as even watching how the CEO and CFO share light moments together.
The role of a CFO cannot be left vacant for a day in any business. Technical expertise, communications skills, healthy relations with fellow exco members and with audit committee members are important for the CFO to be effective. The ability and commitment to fortify and place trust in the internal and external auditors as friends in protecting the business, are also what a CFO must be comfortable with, 100 percent of the time. If the CFO themselves have respect for all the above, their audit committee experiences will be a particularly good one. You will see the audit committee as a fantastic opportunity to enhance your career and to build a solid legacy in the business.
