(The following article was originally published on August 27th, 2009 and was contributed to Corporate Compliance Insights by Fred Lipman, a partner at Blank Rome LLP and the President of the Association of Audit Committee Members, Inc.)
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The Role of the Chief Audit Officer
How to Handle the Changes Inherent in the Current Financial Crisis
The current financial crisis has engendered new challenges for the chief audit officer who typically reports to both the audit committee and to senior management. The financial pressures in many companies have resulted in the reduction in the audit staff while, at the same time, increasing the pressure on the chief audit officer to perform more tasks with a smaller staff.
Audit committees of companies under financial stress typically place more burdens on the chief audit officer to keep them informed of current events. These current events would include, for example, potential failures of the company to meet covenant ratios in bank loans and pressures on cash position of the company caused by slow pay customers. There are typically more meetings of the audit committee to attend and these meetings tend to be much longer. The audit committee may wish to have much more detailed minutes of these meetings in order to reflect in writing their own due diligence in case of a law suit.
At the same time, the chief audit officer is being pressured by senior management to discover new areas of cost savings vital to the survival of the company, including audit staff reductions. These pressures tend to increase as the financial condition of the company worsens.
The chief audit officer must work closely with the chair of the audit committee and senior management to determine the best allocation of time and resources. Rather than waiting to be whipsawed by conflicting tasks from the audit committee and senior management, the chief audit officer should proactively reach out to the chair of the audit committee and place the burden upon the chair to help harmonize directly with senior management the conflicting roles and tasks being assigned.
The decision to use the audit committee chair to assist the chief audit officer from being whipsawed between conflicting tasks assumes that the audit committee chair is conscientious and willing to play that role. If the audit committee chair is unresponsive to a request to help harmonize conflicting assignments, the chief audit officer should feel free to prioritize the assignments from senior management, while at the same time communicating what is happening to the audit committee chair.
A proactive chief audit officer ought to suggest potential cost savings within his or her own department, including not only layoffs but rolling “vacations” without pay and other cost saving measures. The internal audit work of the company may be seasonal, which would lend itself to rolling vacations. The company may be suffering from reduced revenues and plant closing caused by the current recession and this should result in less places to audit.
The chief audit officer ought to determine to what extent outsourcing internal audit functions is cost efficient and recommend to senior management and the audit committee the use of outsourcers where it is prudent to do so.
Finally, the chief audit officer should, in consultation with the audit committee and senior management, pursue those tasks which are most important to the company and its survival.
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About the Author
Mr. Frederick Lipman is an internationally known authority on business law and has authored 12 books on the subject. He has appeared on CNN, CNBC, Bloomberg, and Chinese television and has been quoted in the Wall Street Journal, USA Today, Forbes, and other publications.
Mr. Lipman was a lecturer in the MBA program at the Wharton School of Business for five years and at the University of Pennsylvania Law School for ten years. A graduate of Harvard Law School, he has more than 40 years of experience in corporate governance (including special committee and controlling shareholder representation), trust law, mergers and acquisitions, insurance, private equity, and IPOs.
Mr. Lipman can be contacted via email at Lipman[at]BlankRome[dot]com.)
Mr. Fred Lipman is an internationally known authority on business law and has authored 12 books, including International and U.S. IPO Planning (John Wiley & Sons, Inc. 2009), Valuing Your Business: Strategies to Maximize the Sale Price (John Wiley & Sons, Inc. (2005), Executive Compensation Best Practices (John Wiley & Sons, Inc. 2008), Corporate Governance Best Practices (John Wiley & Sons, Inc. 2006), and Audit Committees (The Bureau of National Affairs, Inc. 2008).
He has appeared on CNN, CNBC, Bloomberg, and Chinese television and has been quoted in the Wall Street Journal, USA Today, Forbes, and other publications. Mr. Lipman was a lecturer in the MBA program at the Wharton School of Business for five years and at the University of Pennsylvania Law School for ten years. He has lectured in China, Thailand, and India. A graduate of Harvard Law School, he has more than 40 years of experience in corporate governance (including special committee and controlling shareholder representation), trust law, mergers and acquisitions, insurance, private equity, and IPOs.
He serves as president of the Association of Audit Committee Members, Inc., a not-for-profit organization dedicated to developing national best practices for audit committees.
Mr. Lipman has held faculty positions with the Wharton School of Business, the University of Pennsylvania Law School, and Temple University Law School.
He is listed in Chambers USA, Who’s Who in America, Who’s Who in American Law, Who’s Who in Finance and Industry, and Who’s Who in the World, and is active in civic affairs. Mr. Lipman has received the highest possible rating from Martindale-Hubbell.
