How Audit Committees Can Prepare for 2024 Q1 Reporting, a report from the EY Center for Board Matters, provides a summary of key development related to risk, financial reporting and regulatory matters during the months of January through March 2024. It also provides a roadmap for what may be coming down the pike through to the end of the year. We spoke to Patrick Niemann, EY Center for Board Matters audit committee forum leader, about risks audit committees are having to monitor in 2024, questions audit committees should be asking internal and external auditors and more.
Directors & Boards: What would you say are the main drivers of risk that audit committees are having to pay an increased amount of attention to as we move into 2024?
Patrick Niemann: Risk is the watch word. Audit committee chairs need to stay on top of its many critical drivers. Among those are AI; cybersecurity and data privacy; geopolitics; regulatory changes; macroeconomics; environmental, social and governance issues; talent and organizational culture; and fraud and ethics. Audit committees must assess those and other risk drivers and consider the near- and long-term business implications.
Amid the ongoing concerns, as we discuss in our EY Center for Board Matters report, How Audit Committees Can Prepare for 2024 Q1 Reporting, audit committees should weigh the major instigators of risk to effectively manage growing audit committee agendas. That includes being mindful of the unforeseen or “black swan” risks that can arise without even being on a company's risk cartography because of their impact when they happen.
DB: What impact will the new Global Internal Audit Standards from the Institute of Internal Auditors have on the work of audit committees?
PN: The new Global Internal Audit Standards establish expectations for the internal audit profession and provide a refreshed view of the value internal audit can bring to organizations. While these standards are not mandated, conforming to them may offer boards comfort when they know internal audit is operating within a trusted framework and delivering on its mandate.
The standards highlight the board's role in enabling internal audit through certain responsibilities, such as defining the appropriate authority, role and responsibilities of the internal audit function, approving the internal audit charter, interacting and communicating collaboratively with the chief audit executive and informing the CAE on expectations regarding the information needed for the board to conduct its oversight responsibilities.
DB: What are some of the key issues for audit committees in the area of accounting and disclosures?
PN: When it comes to accounting and disclosures, we anticipate that audit committees will continue to evaluate the impacts of the uncertain economic environment and ongoing changes in the business landscape on their financial reporting processes. Commercial real estate is among the accounting-related considerations that audit committees may want to consider with respect to the economy. Most notably, entities that own or operate commercial real estate and their lenders will need to consider how their accounting and financial reporting may be affected by such macroeconomic factors as the cost of capital, tighter lending standards and industry trends, including changes in cash flows and occupancy rates for certain properties. The continuing trends with inflation and interest rates are clearly important for audit committees to monitor for effects on accounting and disclosures.
DB: There has been a stay applied to the SEC's new climate disclosure requirements. With that in mind, how should audit committees be preparing for those rules and other possible SEC rulemaking?
PN: While the SEC determined to stay the new climate requirements in early April 2024, audit committees should discuss with management teams the company's readiness and implementation efforts to comply with the requirements once legal challenges are resolved. It's also vital that audit committees stay abreast of the interest from other constituencies, such as institutional shareholders, employees or customers, who may place high value on information relating to a company's climate efforts. Finally, aside from the SEC rule, there are other regulatory bodies imposing climate disclosure requirements, such as Europe and the state of California – even for companies who are not based there, the rules may have impact. Accordingly, audit committees should understand the regulatory landscape to ensure that companies are implementing and maintaining strong disclosure controls and procedures over climate‑related data to produce investor-grade and assurance-ready climate disclosures as needed.
DB: There are a host of possible questions audit committees should be asking and considering in your report. What specifically are the most important questions audit committees should be asking internal and external auditors at this time?
PN: While each company will have specific circumstances that dictate the most important questions for auditors, a focus on risk is always important. Ask about specific known risk areas that may impact financial reporting and internal controls. Probe auditors for their perspective on challenging or complex estimations, red flags they may see, and the company's readiness in areas like adoption of new rules and regulations. Additionally, internal and external auditors typically have broad insights into the company's operations, including talent. Audit committees are wise to inquire about auditors' views on the talent levels in various parts of the organization and where they see gaps or, just as importantly, individuals with great potential.