The role of the audit committee has never been more critical—or complex. With increasing scrutiny from regulators, heightened cybersecurity threats, and a rapidly changing business environment, audit committees are expected to address a growing list of responsibilities while maintaining a focus on their core mandate: ensuring the integrity of financial reporting.
This article explores the key responsibilities audit committees must prioritize in 2024 and provides actionable strategies to adapt and excel in this demanding landscape.
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Overseeing Financial Reporting Integrity
Why It Matters: At the heart of the audit committee’s role is ensuring that financial statements are accurate, transparent, and comply with regulatory requirements. With evolving accounting standards and increased stakeholder scrutiny, this responsibility is more complex than ever.
What to Focus On:
- Ensure management is effectively implementing new accounting standards, such as FASB’s Accounting Standards Update (ASU) 2024-03 on disaggregation of expenses, which requires more detailed reporting of income statement costs to enhance transparency.
- Review compliance with ASU 2024-04, which clarifies the accounting for induced conversions of convertible debt instruments to ensure consistency and accuracy.
- Monitor disclosures for clarity and compliance, particularly in areas of heightened investor interest, such as non-GAAP measures.
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Strengthening Cybersecurity Oversight
Why It Matters: Cyber threats pose significant risks to financial reporting systems and organizational integrity. The audit committee plays a crucial role in ensuring that cybersecurity risks are adequately addressed within the company’s risk management framework.
What to Focus On:
- Review the organization’s cybersecurity policies, including incident response plans and access controls over financial systems.
- Collaborate with IT leadership to assess whether key financial systems are protected against breaches that could compromise data integrity.
- Ensure that management is meeting disclosure obligations for material cybersecurity incidents, as required by the SEC.
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Managing Risk in a Volatile Environment
Why It Matters: Risk management has expanded beyond traditional financial risks to include operational, regulatory, and strategic risks. Audit committees must ensure that risk oversight processes are comprehensive and aligned with organizational goals.
What to Focus On:
- Evaluate the company’s risk assessment framework, ensuring it addresses emerging risks such as inflation, supply chain disruptions, and workforce challenges.
- Oversee the effectiveness of internal controls designed to mitigate identified risks.
- Stay informed about evolving regulatory requirements that could introduce new compliance risks.
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Enhancing Internal Controls and Compliance
Why It Matters: Robust internal controls are essential to maintaining financial reporting accuracy and operational integrity. audit committee is responsible for overseeing these controls and ensuring that compliance programs meet regulatory expectations.
What to Focus On:
- Review management’s testing of internal controls over financial reporting (ICFR) and address any deficiencies promptly.
- Ensure compliance programs are up to date, particularly in high-risk areas such as anti-bribery and anti-corruption regulations.
- Support management’s adoption of new technologies to improve control efficiency and effectiveness.
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Reviewing and Updating the Audit Committee Charter
Why It Matters: The audit committee charter serves as a foundational document that defines the committee’s scope, responsibilities, and authority. Periodic reviews ensure that it remains aligned with regulatory changes and the organization’s evolving priorities.
What to Focus On:
- Conduct an annual review of the audit committee charter, comparing it against regulatory guidance and industry best practices.
- Update the charter as necessary to reflect changes in committee responsibilities or organizational needs.
- Use the charter as a reference point to ensure that meetings and activities align with the committee’s objectives.
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Maintaining a Quarterly Matrix of Audit Committee Topics
Why It Matters: A well-structured meeting agenda ensures that all critical topics are addressed regularly while preventing duplication or oversight. A quarterly matrix provides transparency and helps prioritize the committee’s focus.
What to Focus On:
- Develop a matrix that outlines recurring topics such as financial reporting reviews, risk updates, and internal audit findings, meetings with executives and audit partners and assign them to occur in specific quarters of the year or audit committee meetings.
- Include additional topics based on emerging risks, regulatory developments, or business needs.
- Use the matrix as a planning tool to align meeting agendas with the committee’s charter and organizational priorities.
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Fostering Effective Relationships with External Auditors
Why It Matters: The relationship between the audit committee and external auditors is critical to ensuring audit quality and addressing key risks effectively.
What to Focus On:
- Conduct annual assessments of the external auditor’s performance, focusing on independence, objectivity, and technical expertise.
- Engage in robust discussions about critical audit matters (CAMs) and significant risks identified during the audit.
- Ensure alignment between the external audit plan and the company’s risk profile.
- Ensure company management has adequately addressed any significant deficiencies or material weaknesses identified in the prior year audit.
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The Role of the Audit Committee Financial Expert
Why It Matters: The designation of an audit committee financial expert (ACFE) is more than a regulatory checkbox—it is a critical component of robust financial oversight. This individual brings the expertise needed to navigate complex financial reporting issues, evaluate risks, and ensure compliance with evolving standards, acting as a cornerstone of the audit committee’s effectiveness.
What to Focus On:
- Ensure the ACFE fully understands their role in supporting the audit committee, including providing deep financial insight and acting as a key liaison between management, external auditors, and the committee.
- Provide the ACFE with the resources and tools necessary to effectively execute their responsibilities, such as ongoing training and access to relevant information.
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Staying Ahead of Regulatory Changes
Why It Matters: Regulatory requirements continue to evolve, and audit committees must proactively address changes that affect financial reporting and oversight responsibilities.
What to Focus On:
- Monitor updates from the SEC, FASB, and PCAOB, particularly in areas like new ASU’s regarding expense disaggregation and convertible debt disclosures for 2024’s year end.
- Engage with management and external advisors to understand how these changes will impact the company’s reporting and compliance processes.
- Include discussions of regulatory developments in committee agendas to maintain focus on emerging priorities.
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Navigating the SEC Chair Transition
Why It Matters: In December 2024, President-elect Donald Trump nominated Paul Atkins, a former SEC commissioner known for his free-market approach, to succeed Gary Gensler as Chair of the Securities and Exchange Commission (SEC). Atkins’ nomination signals a potential shift in the SEC’s regulatory stance, particularly concerning financial reporting and compliance standards.
What to Focus On:
- Regulatory Adjustments: Anticipate changes in SEC policies that may affect financial reporting requirements and enforcement priorities. Audit committees should stay informed about these developments to ensure ongoing compliance.
- Policy Revisions: With Atkins’ expected emphasis on reducing regulatory burdens, there may be revisions to existing rules. Audit committees must be prepared to adapt their oversight processes accordingly.
- Strategic Planning: Engage proactively with management and external auditors to assess how potential regulatory changes under new SEC leadership could impact the organization’s financial reporting and compliance strategies.
Actionable Steps for Audit Committees in 2024
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Schedule Regular Risk Assessments
Establish a structured risk assessment process that evaluates financial, operational, regulatory, and cybersecurity risks on a regular basis. Integrate management’s assessment of internal controls over financial reporting (ICFR) to identify deficiencies and prioritize areas requiring enhanced oversight. Set a quarterly schedule for reviews, collaborate with management to address critical risks, and provide the audit committee with updates on identified vulnerabilities and mitigation progress
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Invest in Cybersecurity Expertise
Consider adding a cybersecurity expert to the audit committee or leveraging external advisors.
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Engage Proactively with External Auditors
Schedule regular, independent meetings between the audit committee and external auditors, separate from management, to align on the audit scope, discuss emerging risks, and review progress. Use these sessions to address any concerns, gain insights into critical findings, and ensure the audit remains on track.
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Key Performance Indicators (KPIs)
Review and track financial and operational metrics that highlight trends, variances, and anomalies. Request regular updates from management, focusing on KPIs aligned with the organization’s strategic priorities and risk profile. Use these insights to identify potential risks in financial reporting or operations, ask clarifying questions, and ensure the metrics remain relevant to evolving business conditions.
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Provide Training for Committee Members
Develop a structured onboarding process for new audit committee members, including an overview of key responsibilities, recent regulatory changes, and the organization’s risk profile. For all members, provide periodic updates or special briefings on emerging regulations, evolving industry practices, and technical accounting topics relevant to the committee’s work. Use concise, tailored materials and expert presentations to ensure members stay informed without requiring extensive time commitments.
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Leverage the Audit Charter and Topic Matrix
Use the audit committee charter as a foundational guide to define roles, responsibilities, and oversight priorities. Pair this with a detailed topic matrix to ensure key issues, such as risk assessments, compliance updates, and financial reporting matters, are addressed systematically throughout the year. Review and update these tools annually to maintain alignment with organizational and regulatory changes.
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Monitor Regulatory Adjustments
Stay informed about potential changes in SEC policies that could affect financial reporting and compliance. Regularly review updates from the SEC and discuss implications with management.
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Adapt Oversight Processes
Prepare to adjust the audit committee’s approach to align with revisions to existing rules under new SEC leadership. Ensure processes remain compliant while addressing emerging priorities.
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Engage in Strategic Planning
Collaborate with management and external auditors to evaluate how anticipated regulatory changes might impact financial reporting and compliance strategies. Build flexibility into planning processes to respond quickly to shifts in policy.
Final Thoughts
The responsibilities of audit committees continue to expand, requiring a balance between traditional oversight functions and emerging challenges like cybersecurity and regulatory shifts. By focusing on key priorities and adapting proactively to new demands, audit committees can provide the strategic oversight organizations need to thrive in 2024.
Take action today by implementing the outlined steps to enhance financial reporting, risk management, and compliance for your audit committee. A proactive approach strengthens the committee’s ability to meet regulatory requirements while driving organizational success and resilience.