Tuesday, December 1, 2009

CFOs as leaders

Recently, I hosted a panel discussion in Melbourne with three prominent CFOs in the Australian business community, I was joined by Matt Bekier (Tabcorp), Tony Connon (Australia Unity Limited) and Peter Meehan (Australia Post). The session was extremely well received with over 260 in attendance.

The aim of the panel discussion was to examine how CFOs dealt with the issues of the global economic downturn along with the lessons learnt and the processes which need to be put into place in order for their company to be well positioned for the upturn.

The panellists were also asked about the one piece of advice they had for CFO's of the future with the most notable observation being, 'I wouldn’t worry too much about accounting standards...the priority for CFOs is that they need to know their business inside-out.' While this observation is strong it gives some sense into the important role CFOs play to the overall success and operation of the business - it is no longer adequate to just oversee the financial viability of an organisation. CFOs of the future need to know all there is to know about their company in order for them to provide strategic, financial and non-financial guidance.

The Institute is dedicated to providing further resources and guidance in the future to the CFO audience. The guidance will form part of a '20 issue series' that the Institute will be launching next year. Stay tuned!

I am interested to hear what other people think about the skill set required of CFOs now and for the future. Your thoughts?

Thursday, November 12, 2009

The role of the audit committee

Amid recent media coverage and an ongoing productivity commission we are all acutely aware of the roles and responsibilities of the remuneration committee of a publicly listed company. However, another important board committee largely misunderstood is the audit committee.

The audit committee, or risk and audit committee in some organisations, is mostly made up of non-executive board members. The audit committee is charged with the appointment, engagements, management and measurement of the annual external audit and subsequent recommendation to the board regarding the sign-off of the financial report.

The evolution of the audit
In the past audit committees may have only met once of twice a year, however now it is common for audit committees to sit four to five times a year. Governance has also played a role in the evolution with more boards recognising that the responsibility for a company's financial reporting rests with them, hence the role of the audit committee has changed and essentially provides an effective mechanism for focusing on issues relevant to such reporting.

AFR roundtable
The evolution of the audit committee was one of the main themes to come out of anAustralian Financial Review (AFR) roundtable discussion which the Institute hosted at our offices today. Participants at the roundtable included chairs of audit committees, an auditor from the Big 4 and myself. The purpose in hosting the roundtable was to clear some of the confusion about the role, drivers and benefit of the external audit which currently exists within the business and investor communities.

The key themes of today's discussion included:
- Evolution of the audit committee
- Role and responsibilities of the audit committee
- The relationship and functionality of external auditors and the audit committee
- The risks for the industry and what the future holds.

The roundtable experience was beneficial as I was able to learn from the participant the key issues, and future challenges that the audit committee will face along the road to continued evolution.

After the roundtable tt was pleasing to come to the conclusion that Australia's auditing profession, along with the current framework of auditing standards, is among the world's best. However, looking towards the future we should be continually challenging ourselves to identify and develop actions that aim to improve auditing practices and outcomes.

A guide to audit quality
To date there has been very little guidance, to which I am aware of, to help businesses understand the quality of the audit service being provided to them. In this regard, the Institute has produced a guidance document aimed at educating the marketplace on the specific drivers of audit quality. We have recently witnessed that the role of audit can be understated and undervalued. This guide will help ensure Australia remains focused on the benefit of audit. The guide will be available free of charge from the Institute of Chartered Accountants website (www.charteredaccountants.com.au) in the coming weeks so stay tuned.

Wednesday, October 21, 2009

The future for rating agencies

Since the start of the global economic downturn considerable emphasis has been placed on the roles and responsibilities of various stakeholders. One group in particular that has had its share of the spotlight is credit rating agencies (CRAs).

There has been a significant amount of discussion in the media around the role of CRAs. The value of credit ratings has been widely questioned as have the perceived weaknesses in their processes (including not downgrading companies promptly enough) and the potential for regulatory reform. It is this last point which is particularly interesting.

There is no doubt that CRAs fulfil an essential role in the global capital markets. The ongoing role of CRAs is to instil confidence and integrity to our capital markets, the current challenge facing the industry is to restore the confidence, value and role of all participants in the marketplace.

There is a hurdle though, relating to conflicts of interest – real and perceived – which significantly diminish the value of their work. Ratings were perceived, at times, to contain bias (poorer quality) because of the financial incentives and future revenue rewards. Yet how do we respond globally to those perceptions?

We have seen the International Organisation of Securities Commissions (IOSCO) announce that it would update the Code of Conduct (and that has now been done) to provide more detail on minimum standards for regulating the activity of CRAs. And in Australia, CRAs will be required to hold an AFS licence and full details of this regime will emerge soon. But will this be enough?

It is interesting to compare this approach with what occurred with the global audit profession in the last couple of years.

After the collapses of Enron, Worldcom and HIH Insurance there was a global push to change the perceptions around the independence of auditors. Auditors were seen to be ‘too close’ to their clients at the potential detriment of users of their audit reports. In the United States we saw SOX reform and in Australia CLERP9 as two types of responses. We also witnessed the change in ethical standards and the increase in the requirements for auditors to fulfil, and the introduction of auditor oversight regimes (PCAOB in the US and ASIC in Australia) which independently examined the policies and practices of auditors regarding independence and quality. These were fundamental changes for auditors.

Perhaps most importantly of all, we observed that auditors recognised that they had to change perceptions. They could see they had to respond. They invested heavily in additional resources and systems to deal with new requirements, and as a result much has changed.

So when I compare what has happened with auditors, I can only sense that there will be much more to come with the CRAs. It is important there is balance in regulatory responses and public policy settings. It is also very important that the CRAs recognise the challenge of changing perceptions. There are some interesting times ahead.