Audit Committee Cheat Sheet

Caution: if you only used my cheat sheet, you will not be fulfilling your fiduciary duties as a board director!

In 2013, I enrolled in the Finanacial Times Non-Executive Director Diploma program, the inaugural cohort in Hong Kong. The calibre of senior business leaders in my cohort left a lasting impression on me.

The program proved to be rigorous and demanding. Having been out of academia for some time, adjusting to meeting minimum word counts on assignments required some effort.

To simulate authentic boardroom experiences, analyzing annual reports and financial statements constituted a key aspect of our proctored exam. It was during this phase that a sense of panic ensued.

“Elaine, you’ve got this because you are a CFO. The rest of us are going to fail the exam!” exclaimed a classmate.

“Wait a minute! You are CEOs and MDs with significant P&L responsibilities, scrutinized countless financial statements throughout your careers!” I countered.

It was then that I realized the terms "finance" and "audit" often triggered feelings of impostor syndrome, regardless of gender.

To assist my esteemed classmates in overcoming their mental barriers, I developed this cheat sheet, enabling them to leverage their extensive business acumen.

Common Misunderstandings

• "Why didn't the auditor catch this mistake, even though they audited our financial statements?"

Auditors prioritize their efforts based on materiality, focusing on identifying and rectifying significant errors or discrepancies that could significantly impact the financial statements. Minor adjustments might not meet the materiality threshold, hence going unnoticed.

• "Why didn't the auditor detect this fraud?"

Fraud detection typically involves distinct techniques and procedures beyond routine audits. Organizations must implement additional measures, such as robust internal controls and anti-fraud programs.

• “The Audit Committee has already approved the financial statements. Isn't additional approval by the board unnecessary?"

While the Audit Committee's approval is essential, the board bears ultimate responsibility for the company's financial health and integrity. Their endorsement signifies acknowledgment and acceptance of the financial statements, aligning with their fiduciary duties to safeguard the interests of shareholders and stakeholders.

Asking the Right Questions

Here's a secret: The essence of being a board director lies in posing questions rather than providing answers. Naturally, these questions must be pertinent to prompt meaningful discussions.