Originally published on The Accountant, Wednesday 4 March
"Culture" is perhaps not the first word you would associate with the work of audit committees, but it was certainly a central theme emerging at a recent forum in Sydney on audit committees hosted by CPA Australia and Macquarie University's International Governance and Performance Research Centre (IGAP).
Governance has a tendency to become convoluted through over analysis - we find ourselves with rules, regulations, frameworks and all sorts of perspectives. However, quality governance is more often achieved through quality conversations and the functions around the audit committee which are essentially about the culture of the organisation itself.
Almost a decade ago I was invited to chair the audit and risk committee of what I thought was a "low key" government agency in Australia which deals in the control of information and covert operations. Eight years later and I've learnt that it was anything but low key, and it has certainly been an experience rich in new perspectives and lessons in governance.
Gaining clear information is difficult in any large organisation. From my professional experiences, I have learnt to glean information through my various conversations with staff and with the auditor in situations where we needed to delve a little deeper. These are the conversations that can reveal the potential shortcomings of the existing structures that support the audit committee.
Audit committees have become a panacea of sorts for a number of key business issues impacting on the integrity of capital markets, including audit quality, going concern, transparency, sustainability and contemporary governance challenges. The focus on these issues is warranted.
Effective audit committees exhibit a meaningful degree of independence but are also close enough to have an informed appreciation of the issues, risks and culture of the organisation. They also have a good skills mix, which provides them with the credibility necessary to be influential as a part of the highest level of corporate governance.
Ironically, the emphasis for audit committees over recent years has been, to some extent, defined by a set of checklist-ready rules. At best, this approach ignores the real value and work of a strong audit committee in interrogating and leading the culture of an organisation.
How many conversations have we had about that? Worse still, the unintended consequence of such a prescriptive approach to guiding the work of audit committees is unnecessary complexity and a compliance focus that can distract from a more pressing, organic governance role.
There have been countless examples of organisations whose governance and values looked great on paper, but where a toxic culture nonetheless existed. The signs are always obvious in hindsight - hubris, hyper-competitiveness, a culture of fear that chokes real innovation and confounds the escalation of issues of concern.
I have found from my various professional experiences that the nature of the questions you ask at an audit committee and the sense you get from the body language exhibited by those responding is telling. When I ask a simple question and get a lot of information in return, I get nervous. While part of our training is often to go into detail when managing organisational risk, professional scepticism, judgement on the priority issues and simplicity come to the fore.
The world is changing. Just ten years ago many would not have foreseen the impact that social media, crypto-currencies, high frequency trading and crowd funding would have on businesses. Yet these are the issues that are now being elevated in priority on board and audit committee agendas.
While the risks and topics continuing to change, what won't change is the central truth around the importance of governance simplicity, quality conversations and organisational culture in dealing with whatever the risk of the day happens to be.
Alex Malley is chief executive of CPA Australia.