The Changing Role of the Chief Audit Officer in the Current Financial Crisis

(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.

role-of-chief-audit-officerAudit 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.)

About the Author

Fred Lipman

Frederick D. Lipman is an internationally known authority on corporate governance, risk management, and business topics, and is a senior partner at the international law firm of Blank Rome LLP.  The author is also President of the Association of Audit Committee Members, Inc., a non-profit organization with a website located at www.aacmi.org.  This article contains excerpts from his book entitled “Whistleblowers: Incentives, Disincentives and Protection Strategies” (John Wiley & Sons, Inc., 2012), which are reprinted with permission of the publisher.  Mr. Lipman has authored 15 books, including 3 other books on corporate governance, namely, Audit Committees (The Bureau of National Affairs, Inc. 2013), Executive Compensation Best Practices (John Wiley & Sons, Inc. 2008), and Corporate Governance Best Practices (John Wiley & Sons, Inc. 2006), as well as other books on initial public offerings, valuing and selling businesses and employee incentives.  Mr. Lipman’s Executive Compensation Best Practices book was cited by the SEC in its decision to change the compensation chart for all public companies.  His Corporate Governance Best Practices book is used as either required or supplemental reading in a number of universities around the world.  Mr. Lipman has lectured on corporate governance topics at the United Nations in Geneva, Switzerland, and in China, Thailand and India.  Mr. Lipman held faculty positions in the MBA program at the Wharton School of Business and at the University of Pennsylvania Law School for a combined total of 13 years and at Temple University of Law School for 5 years.