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Audit committees in risk overload

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27th Jun 2008
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With the credit crunch showing no sign of diminishing and an economic slowdown seemingly taking hold, audit committee members are putting risk management at the top of their agendas – so says a survey by KPMG. The survey took in the views of almost 150 UK audit committee members of public companies, and over 1,000 committee members globally. It revealed that risk management is now the clear first priority of audit members, surging ahead of the more traditional areas of committee activity such as accounting judgements and internal controls.

Only 46% of audit committee members were very satisfied that their company has an effective process to identify potentially significant business risks. Worse, only a meagre 38% were very satisfied with the risk reports they received from management.

KPMG attributed the priority accorded to risk this year to a number of factors. The fallout from sub-prime exposure and the credit crunch, increasing awareness of significant business risks and their potential impact, and heightened scrutiny of risk management and its oversight, have all played a part, the firm said.

“Recession-related risks as well as the quality of the company’s risk intelligence are two of the major oversight concerns for audit committee members,” said Tim Copnell, head of KPMG’s UK Audit Committee Institute. “But there is also concern about the culture, tone, and incentives underlying companies’ risk environments, with many saying the board and or audit committee needs to improve.”

While oversight of compensation plans may generally fall within the responsibility of the remuneration committee, audit committees are now addressing such plans from a risk perspective. Little wonder that committees feel they are overburdened. Over half of the survey respondents expressed concern that the audit committee has been assigned, or has assumed, too much responsibility for risk oversight.

Nearly two thirds of respondents were also concerned that the personal risk attached to being an audit committee member has increased over the last year. Three quarters believed they face greater risks and legal obligations than other members of the Board.

Given the current business climate, the pressures to meet expectations will probably increase even further, the firm said.

“Many say the committee’s effectiveness may be hampered - or negatively impacted - by overloaded agendas,” Copnell added.

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