Latest / PwC's accounting podcast / Year-end toolkit: Strengthening audit committee collaboration

Transcript

Year-end toolkit: Strengthening audit committee collaboration · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought leadership from PWC's national office Hello and welcome back to PWC's Accounting Podcast.
• 0:11
  SPEAKER_02: I'm Heather Horn.
• 0:13
  SPEAKER_02: In today's continuation of our year and mini-series, we're focusing on those charts with governance and how finance teams can best prepare to communicate effectively, better support the audit committee, and make the most of limited time together.
• 0:27
  SPEAKER_02: We'll cover everything from agenda setting strategies and report preparation to how AI, ERM, and other hot topics are showing up in boardroom discussions.
• 0:42
  SPEAKER_02: Joining for today's conversation is Stephen Parker, a partner in PWC's Governance Insights Center.
• 0:48
  SPEAKER_02: Stephen works closely with audit committees and the management teams who support them and brings a wealth of practical experience on what's working and where there's room to improve.
• 0:58
  SPEAKER_02: And serving as the guest host for today's episode is Diana Stoltzfas, a partner in PWC's national office, who brings her own perspectives from her years as an audit partner.
• 1:09
  SPEAKER_02: With that, let's start the episode.
• 1:12
  SPEAKER_01: Well, welcome, Steven.
• 1:13
  SPEAKER_01: Thanks so much for joining me today.
• 1:14
  SPEAKER_01: It's great to have you on the podcast.
• 1:17
  SPEAKER_01: So with this time of year, we're getting into the year-end reporting season.
• 1:21
  SPEAKER_01: Many of our December 31 year ends are beginning to report to their audit committees.
• 1:25
  SPEAKER_01: So with so much going on, I know there's not a shortage of issues to cover, but maybe before we just dive into some specific topics, what are some of the challenges you're seeing today in how management and the audit committee are engaging?
• 1:40
  SPEAKER_04: Well, thanks, Diana, for having me.
• 1:41
  SPEAKER_04: It's it's great to be back with you guys and talking about these important um topics.
• 1:46
  SPEAKER_04: And you know, to answer your question, I think I don't know if it'll surprise your listeners, but um I I think one of the biggest uh kind of threads that comes through some of our discussions with all of these challenges.
• 2:01
  SPEAKER_04: I mean, 2025 certainly was full of challenges, and we knew that it was going to be.
• 2:07
  SPEAKER_04: Um, but I think 2026 is set up to have some of the same complexity, some of the same volume, some of the same pace of change.
• 2:15
  SPEAKER_04: Um and and in times like this, what I hear from directors is that they are looking to build deeper relationships with management.
• 2:27
  SPEAKER_04: And, you know, the the reason is is that I think with stronger relationships comes trust, um, comes candid dialogue, which you need to have, um, comes an understanding of and an alignment on what should be in the reporting packages, the materials, how agendas should be set up.
• 2:51
  SPEAKER_04: And and so I I guess I would offer that up as a start, because a lot of people may not think about that.
• 2:56
  SPEAKER_04: It's maybe not so much the the how do you tackle the topics, but how do you lay a foundation for being able to tackle the topics?
• 3:05
  SPEAKER_04: Right.
• 3:06
  SPEAKER_04: So that's where I'd start.
• 3:07
  SPEAKER_01: Okay.
• 3:08
  SPEAKER_01: And I I think that's true with anything, is trust is such an important foundation of any relationship.
• 3:12
  SPEAKER_01: And if you don't have that trust up front, that when you get into these challenging situations and difficult topics, it makes it even harder to deal with.
• 3:19
  SPEAKER_04: Yeah, fair enough.
• 3:21
  SPEAKER_01: Okay.
• 3:21
  SPEAKER_01: So one of the things that you mentioned, which I think is a common question we hear a lot, is around the board agenda.
• 3:28
  SPEAKER_01: And so, in addition to these building trusting relationships, what are some of the ways that management can tackle this challenge of managing the board agenda?
• 3:38
  SPEAKER_04: Yeah, I um uh there's a lot of little tactics.
• 3:42
  SPEAKER_04: I I often get this question from chairs, you know, hey, this is how what we're experiencing, are others experiencing it?
• 3:50
  SPEAKER_04: Yes, they are.
• 3:50
  SPEAKER_04: And so what are they doing?
• 3:52
  SPEAKER_04: You know, what's the one thing I can do?
• 3:54
  SPEAKER_04: And unfortunately, there's just not a silver bullet to uh to tackle that issue.
• 3:59
  SPEAKER_04: Um and and we've talked about several things, even on this podcast before, we've talked about some of those tactical things that management can do.
• 4:08
  SPEAKER_04: Um, and and I'm really encouraged because just before the break, probably a month or so, six weeks before, we really started getting a lot of inquiries from management teams, but also from audit committee chairs around management's reporting packages.
• 4:26
  SPEAKER_04: You know, can you take a look at them?
• 4:27
  SPEAKER_04: We're looking to try to be more succinct.
• 4:31
  SPEAKER_04: We're trying to figure out how do we navigate all these things.
• 4:34
  SPEAKER_04: Our agenda continues to get packed.
• 4:36
  SPEAKER_04: And um, and so I mean, what I would offer up is some of the things that we talked to folks about then.
• 4:41
  SPEAKER_04: We've we've talked about this before, but it's clear that um while some have really tackled this, others need to.
• 4:49
  SPEAKER_04: And even those that might have done done some, made some changes, you know, a year, year and a half ago, it might be worth looking at again.
• 4:55
  SPEAKER_04: And and just some some quick hits, I guess.
• 4:58
  SPEAKER_04: You know, one is in every section of your package, your reporting package to the audit committee or even the board, um, we we recommend that that you ought to have an executive summary.
• 5:09
  SPEAKER_04: So one or two pages, uh, you know, I don't know, four to four to six significant topics that you want your directors to focus on.
• 5:19
  SPEAKER_04: Whether you uh, you know, this is information that they need to know or or it's things that they need to act on, or you know, disclosures they need to pay attention to, or or where you just want their perspective.
• 5:33
  SPEAKER_04: We want your views on these topics.
• 5:35
  SPEAKER_04: And um, and and then you can have you know some supporting slides, pages after that, uh, but it's really about getting them focused.
• 5:44
  SPEAKER_04: And I like to suggest that, you know, when I'm talking to the finance and accounting team, that they should work on that.
• 5:51
  SPEAKER_04: But I'm like, hey, internal audit needs to do the same thing, and you know, tax would need to do the same thing, or IT.
• 5:58
  SPEAKER_04: I mean, make really keep them uh consistent.
• 6:00
  SPEAKER_04: And I think that helps directors.
• 6:03
  SPEAKER_04: Um I think it's also we're talking about adding things like an executive summary, but it's also important to talk about what could be taken out.
• 6:10
  SPEAKER_04: Right.
• 6:11
  SPEAKER_04: Um I looked at a lot of packages where it's clear that some of this detail has just accumulated over years.
• 6:17
  SPEAKER_04: And some of the directors who wanted this are no longer even on the board.
• 6:21
  SPEAKER_04: Um so really taking a fresh look and seeing what can we take out and making sure that your reporting is focused on at a director level and not a management level, you know, because there's a lot of detail that management needs to have.
• 6:36
  SPEAKER_04: Um looking for opportunities to put dashboards in there, pictures can say a lot.
• 6:42
  SPEAKER_04: And so, you know, looking for ways to have red, green, and yellow indicators.
• 6:46
  SPEAKER_04: And so directors say see a lot of green, not that important to spend a lot of time in the meeting on that kind of stuff.
• 6:53
  SPEAKER_04: Um, and and whether it's internal audit or it's compliance or it's fraud uh prevention, there's a lot of opportunities for dashboards and even some of the other topics that we may get to um around oversight.
• 7:05
  SPEAKER_04: And um, and and then I would say to have agility in agenda setting.
• 7:10
  SPEAKER_04: In the years that I was serving clients, I can say that the the audit committee agenda probably looked about the same every quarter.
• 7:18
  SPEAKER_04: Right.
• 7:19
  SPEAKER_04: You know, it didn't matter.
• 7:20
  SPEAKER_04: Um, but whoever went first always went first.
• 7:24
  SPEAKER_04: And if we were going last as the external auditor, we were always last.
• 7:28
  SPEAKER_04: And uh and I just don't think that in today's world you can afford to do that.
• 7:32
  SPEAKER_04: The most important topics need to be first, second on the agenda, and then you get to some of the others.
• 7:37
  SPEAKER_04: And and that decision, um, I I I I know some audit committee chairs, I think they do a great job.
• 7:44
  SPEAKER_04: They're even willing to to move agenda items around after the conclusion of an executive session for the first 10 minutes of the meeting.
• 7:53
  SPEAKER_04: So the committee members are meeting, they're getting kind of aligned on what's important.
• 7:58
  SPEAKER_04: When they bring everybody else in, they may say, hey, item four is now item one.
• 8:03
  SPEAKER_04: You know, let's be prepared to move because that's what everybody wants to hear about.
• 8:06
  SPEAKER_04: Right.
• 8:07
  SPEAKER_04: And then, you know, the last thing that we talk about a lot in terms of dealing with the agenda or making sure that you can cover everything is the way that the management team, uh, the presenters kind of go about delivering their messages.
• 8:20
  SPEAKER_04: So we we often will say, you know, don't flip slides.
• 8:25
  SPEAKER_04: I mean, focus on that executive summary, it's why it's so important.
• 8:28
  SPEAKER_04: Provide context on why those items are there.
• 8:32
  SPEAKER_04: And you spend about a half the amount of time doing that, and then the rest is allocated for discussion with committee members.
• 8:39
  SPEAKER_04: And I just think that's critical to making the most of that time.
• 8:43
  SPEAKER_04: And so you feel like now we've got an appropriate amount of oversight that's occurring versus just kind of navigating through the through the pages.
• 8:52
  SPEAKER_01: Yes, yes, that's exactly right.
• 8:54
  SPEAKER_01: Yeah, I mean, I think it's such a great point.
• 8:56
  SPEAKER_01: Like there's such limited time that management teams and the audit committees have together, and so making it as efficient as possible.
• 9:02
  SPEAKER_01: And I love your suggestion of having the questions too at the beginning of the sessions, like what questions they want for the committee members, so that the committee members have time to think about it and not just kind of absorbing that information or trying to respond in the spot, but can have, you know, think about it before you get into the meeting.
• 9:18
  SPEAKER_04: Right, in advance.
• 9:19
  SPEAKER_04: And and it comes back to um, you know, we talk about give I'll go back to building those relationships, but really knowing your audience.
• 9:26
  SPEAKER_04: So, you know, if you've got four audit committee members, they they're not all interested in the exact same things.
• 9:32
  SPEAKER_04: And so by spending time with them, you understand what they're really focused on.
• 9:36
  SPEAKER_04: Then again, your messaging can speak to what you know each of their concerns might be.
• 9:41
  SPEAKER_04: Again, then you're you're hitting the nail on the head.
• 9:44
  SPEAKER_04: It's very effective and efficient, uh, but it takes a little bit of work on the part of the management team.
• 9:49
  SPEAKER_04: But we've seen it it creates success.
• 9:53
  SPEAKER_04: And uh and I know a lot of companies um have have already adopted some of this, but there's still a lot of improvement.
• 10:00
  SPEAKER_04: And I think the last six weeks, you know, before the break, does speak to hey, folks are still seeing a need to get engaged in these kind of activities.
• 10:09
  SPEAKER_01: Right, right.
• 10:10
  SPEAKER_01: Okay.
• 10:10
  SPEAKER_01: Well, maybe we'll we'll dive into some some specific topics now.
• 10:14
  SPEAKER_01: I know there's a lot going on in the business environment and the regulatory environment.
• 10:19
  SPEAKER_01: I know one thing too, just we also recently had a PWC year-end audit committee webcast last month.
• 10:26
  SPEAKER_01: So we can also encourage our listeners to check out the webcast if you want to hear more about any of these topics.
• 10:31
  SPEAKER_01: And we'll include a link in the show notes to this.
• 10:34
  SPEAKER_01: But Stephen, what are some of the areas that you've seen audit committees focused on as we head into this year-end season?
• 10:42
  SPEAKER_04: Well, I'm I may um just recap some some of those topics that we covered in that webcast.
• 10:47
  SPEAKER_04: Because we do try in that webcast to put on the table some of the things that we think audit committee members really need to be paying attention to and the management teams need to kind of get engaged with.
• 11:00
  SPEAKER_04: Um I don't think anything there will be a surprise to you, but you know, with as we as we talked about so much change in macroeconomic factors, inflation rates, tariffs, uh interest rates, um, the whole geopolitical environment, I think getting an understanding of what's going on in the economy is is really important.
• 11:23
  SPEAKER_04: Um even geopolitical.
• 11:25
  SPEAKER_04: We we focus primarily on the economy uh in our session.
• 11:29
  SPEAKER_04: And and so, I mean, directors want to understand that now, but that but it's a step further, I guess.
• 11:36
  SPEAKER_04: They want to understand how does how do the changes that are going on in the economy impact that particular company?
• 11:45
  SPEAKER_04: Right.
• 11:45
  SPEAKER_04: Or some of these directors are on three or four different companies.
• 11:48
  SPEAKER_04: They may be in different sectors, different industries.
• 11:51
  SPEAKER_04: And I think it's incumbent upon management to one, not necessarily assume that they're keeping up with all that, but two, help them connect the dots in terms of what is what do these things mean for our company, for assumptions that we might be making in our you know, our modeling and our forecasts for our risk environment and and the likelihood that some risk may create an issue for us to accomplish our strategy.
• 12:21
  SPEAKER_04: And and of course, you know, we we do it once a year in terms of having an economist come talk, but but we all know that once a year is not good enough.
• 12:30
  SPEAKER_04: So I think if management can identify, now they may have an economist, but I think it's really important to kind of hear that third-party voice every once in a while.
• 12:38
  SPEAKER_04: So I think management can try to think about whether it's full board or audit committee in particular, how can we allocate some time to get an economic update?
• 12:48
  SPEAKER_04: Right.
• 12:48
  SPEAKER_04: And then follow that up with what's the impact, what does that mean for us?
• 12:53
  SPEAKER_04: Um, as you might imagine, you know, the whole regulatory environment is significant.
• 12:57
  SPEAKER_04: A lot of audit committee members asking us about that.
• 13:00
  SPEAKER_04: So we did focus on kind of what's changing at the SEC, at the PCAOB, um, covered uh a brief update on sustainability.
• 13:11
  SPEAKER_04: I mean, there's an area that uh has a lot of challenges, and I think audit committee members are looking for management to guide them.
• 13:18
  SPEAKER_04: You know, how are how are management teams keeping up with the changes?
• 13:23
  SPEAKER_04: You know, how are they monitoring them?
• 13:25
  SPEAKER_04: Some of them may be using artificial intelligence, you know, large language models to keep track of stuff like that.
• 13:30
  SPEAKER_04: So, how do they stay on top of it and what does it mean for the company?
• 13:33
  SPEAKER_04: Again, it's not just informing them of what's happening, but what's the impact of the company?
• 13:38
  SPEAKER_04: Um, of course, you can't have any session today without talking a little bit about AI.
• 13:42
  SPEAKER_04: So, so that's often a topic that comes up for us, and and um a couple things on that.
• 13:48
  SPEAKER_04: You know, where does oversight of AI sit?
• 13:51
  SPEAKER_04: And we see it, we see it kind of slowly beginning to sit more often at the audit committee.
• 13:57
  SPEAKER_04: Um, how does the audit committee think about all those groups reporting in and AI that they might be using, whether it's departments in the company or it's like even your external auditors?
• 14:09
  SPEAKER_04: But then also, you know, finally, how are directors beginning to use AI in their oversight responsibility?
• 14:14
  SPEAKER_04: So a lot of discussion around AI.
• 14:17
  SPEAKER_04: And um and then I think one of the other topics we we will get uh fairly often is how are folks using internal audit.
• 14:25
  SPEAKER_04: Um you see a trend today of moving away, not away from, but but adding on advisory kinds of work to the audit plan versus just the check the box, you know, go in and audit are we complying or not complying with policies and rules.
• 14:46
  SPEAKER_04: And uh and I think that's very valuable.
• 14:49
  SPEAKER_04: Um and then we cover a basket of other topics, including, you know, the importance of the alignment of risk and strategy, talent oversight, and then the aforementioned kind of agenda setting and efficiency kind of stuff.
• 15:01
  SPEAKER_01: Okay.
• 15:02
  SPEAKER_01: Well, maybe following up on the artificial intelligence, that's a very popular topic these days that we're hearing a lot about.
• 15:08
  SPEAKER_01: You talked a little bit about the audit committee having more oversight over responsibility for artificial intelligence.
• 15:15
  SPEAKER_01: What are the kinds of things that management teams are reporting on?
• 15:19
  SPEAKER_04: Well, um quite a few things, I guess.
• 15:22
  SPEAKER_04: Uh and and maybe I'll I'll just set the stage a little bit.
• 15:26
  SPEAKER_04: In October, late October of last year, we published our our uh corporate directors um survey.
• 15:35
  SPEAKER_04: And um and in that survey, there was a question about you know, what do you want to hear more from management?
• 15:41
  SPEAKER_04: And and I will give you uh uh we we we carved out just the audit committee members that responded, and 69% of the audit committee member responses said they wanted to hear more from from management about AI risks and opportunities.
• 15:57
  SPEAKER_04: So, I mean, that tells me that either they're not listening or or you know, or our management teams need to be spending a little bit more time on kind of describing what that looks like or how they fit.
• 16:11
  SPEAKER_04: And um, and as I mentioned, we are seeing more allocation of AI risk oversight to audit committees.
• 16:21
  SPEAKER_04: Now, for some companies it'll it'll often sit at the full board, um, which which to me makes sense because I I love how other folks, I didn't start this, but other smart people did saying, you know, AI is not an IT issue, it's a business issue.
• 16:37
  SPEAKER_04: Right.
• 16:38
  SPEAKER_04: It it it's part of strategy, and and from it comes a lot of risk.
• 16:43
  SPEAKER_04: And so the board is where oversight of strategy and risk primarily sits.
• 16:50
  SPEAKER_04: But then, you know, they have a full plate too, and so they allocate often to committees, and and so when they do that, we're seeing more and more that that oversight um is getting allocated to the audit committee.
• 17:02
  SPEAKER_04: When when I think about what management teams are including in their reports, it's it's um you know clearly describing what the risks are, um, whether it's model risk, um you know, bias, uh data risk, just just uh um general governance and privacy, uh, but but also the opportunities.
• 17:27
  SPEAKER_04: So I think you've got, you know, because there's both there.
• 17:30
  SPEAKER_04: And you need to understand the opportunities as well as the risks.
• 17:34
  SPEAKER_04: And and then if you think about we're at the audit committee, so it's it's also informing the members what is the impact of these new tools on our processes and our controls as it relates to disclosure and financial reporting.
• 17:49
  SPEAKER_04: Right.
• 17:50
  SPEAKER_04: Um and and what would follow along with that is is how does this impact our talent needs?
• 17:56
  SPEAKER_04: Are we uh are we upskilling our people to be able to deal with these matters?
• 18:02
  SPEAKER_04: Um, are we, do we need to hire new skill sets?
• 18:06
  SPEAKER_04: Um, and and how significant are those needs?
• 18:09
  SPEAKER_04: Then even at the audit committee, you know, I talked about how um, I mean, for those companies where let's just say oversight sits at the full board, the audit committee still wrestles with that internal audit reporting into it is could likely be using, should be using AI tools.
• 18:27
  SPEAKER_04: Uh external auditors are definitely using AI tools in different ways.
• 18:32
  SPEAKER_04: Um there's there's good use cases for compliance departments to be using it, and even in the fraud prevention and detection.
• 18:40
  SPEAKER_04: And so I think making sure, and and what I'd encourage our our audiences, management team members or external auditors, is they make sure they're they're proactively delivering these messages to the audit committee.
• 18:53
  SPEAKER_04: And again, it doesn't, it's not a one and done, like I need 30 minutes to do all this, but it can be throughout the year, should be throughout the year, things evolve.
• 19:01
  SPEAKER_04: And and then maybe the the last thing around AI, I would say, because so so currently we've been talking about just how different groups are using it.
• 19:12
  SPEAKER_04: But then the other challenge that I think management teams need to be proactively thinking about is um going back to that October 2025 study from directors, there were about 35% of them said they're already using AI tools in exercising their oversight in the boardroom, you know, or in the audit committee.
• 19:33
  SPEAKER_04: And I mean that's great, but but that is that comes with risk.
• 19:38
  SPEAKER_04: Right.
• 19:38
  SPEAKER_04: Um, so how are they being careful to not take company-owned data and putting it out into a chat GPT?
• 19:47
  SPEAKER_03: Right.
• 19:48
  SPEAKER_04: Um and uh and and how how are they getting comfortable that you know that they can identify any bias in the the feedback that comes back, the outputs that come back.
• 19:59
  SPEAKER_04: And so I think there's a there's an appetite for directors to be using it in in the boardroom and exercising their oversight, but management teams need to be guiding them through that.
• 20:11
  SPEAKER_04: And so I think it's you know, being very proactive in terms of uh giving them opportunity to utilize the tools, but utilize it in an environment that doesn't create more risk for the company.
• 20:23
  SPEAKER_01: Right.
• 20:24
  SPEAKER_01: That's really interesting.
• 20:25
  SPEAKER_01: Are we seeing a change too in the expertise then at the board and at the audit committee level, given the focus on artificial intelligence?
• 20:35
  SPEAKER_04: I'm sure there's uh there's definitely a little bit more technology expertise today than a year ago or even two years ago.
• 20:43
  SPEAKER_04: Uh I I don't see um well what other what what I I still see kind of a commitment to new directors should not be siloed in terms of their expertise.
• 20:55
  SPEAKER_04: They you want to have them, it's great that they might be strong in a particular area, but they've got to be balanced across the um, you know, the areas of of significant opportunity risk for the company.
• 21:08
  SPEAKER_04: So good general business experience.
• 21:12
  SPEAKER_04: Um I would say if there is an area where where more folks have have probably been added with some cyber background, but then very senior IT execs or cyber execs who you know who bring um other competencies to the table.
• 21:29
  SPEAKER_01: So it's not just a specific button.
• 21:31
  SPEAKER_01: Exactly.
• 21:32
  SPEAKER_01: Well, that makes sense.
• 21:33
  SPEAKER_01: Okay.
• 21:33
  SPEAKER_01: So in addition to AI, what are some of the other areas where you think management teams should be focused?
• 21:39
  SPEAKER_04: Well, some of these may sound like, oh my gosh, he's just talking about what he talks talked about last year, but but it's that they're so important.
• 21:47
  SPEAKER_04: And you know, the first one, hands down, I I think uh one of the biggest questions we get asked is around risk oversight.
• 21:54
  SPEAKER_04: Uh and two things about risk oversight.
• 21:56
  SPEAKER_04: So one is what are we seeing in in And going on in management's enterprise risk process.
• 22:04
  SPEAKER_04: Because think about audit committees, and for financial services companies, maybe it sits at the risk committee, but clearly if you're non-financial services, oversight of management's ERM process likely sits at the audit committee.
• 22:19
  SPEAKER_04: And um and while there's been some evolution there, some places have been great evolution.
• 22:25
  SPEAKER_04: There's still I don't have a percentage, but I can tell you there's a lot of companies that I interact with that still that process might be owned by internal audit.
• 22:35
  SPEAKER_04: Uh they they update the audit committee once a year.
• 22:38
  SPEAKER_04: You know, those are behind the times.
• 22:43
  SPEAKER_04: Trevor Burrus, Jr.
• 22:43
  SPEAKER_01: Especially, you know, we talked about in our first part of our conversation, too, how dynamic the current environment is, how quickly things are changing.
• 22:50
  SPEAKER_01: And to your point, it doesn't seem like that pace of change is slowing down at all either.
• 22:54
  SPEAKER_04: Aaron Powell Exactly.
• 22:55
  SPEAKER_04: And I I think for whatever reason, there, you know, some companies have just not maybe prioritized that as a process that they should be investing in.
• 23:05
  SPEAKER_04: But I get a sense from audit committee members and directors that they're expecting more there.
• 23:12
  SPEAKER_04: And the kinds of things that we see, what what does more look like?
• 23:16
  SPEAKER_04: So it's it's different people might be involved.
• 23:19
  SPEAKER_04: You might even you might have a chief risk officer.
• 23:21
  SPEAKER_04: It might not just be it's likely not just internal audit or not just one person, but you know really the culture of risk needs to permeate the entire organization.
• 23:32
  SPEAKER_04: Um so we see you know, people changes, process changes, so timing of when updates happen, how they accumulate, uh perspectives across the company.
• 23:43
  SPEAKER_04: There's also technology, there's systems that you can acquire that help you with governance, risk, and compliance, not just LOTUS, you know, I mean Excel spreadsheets, which are how a lot of folks still compile results.
• 23:57
  SPEAKER_04: Um and then ultimately the reporting that management makes to the audit committee.
• 24:01
  SPEAKER_04: So not just once a year, providing updates throughout the year, maybe it's two times a year, you know, one annual and then one more update.
• 24:09
  SPEAKER_04: Uh and it's just it's just not just the heat map that gets reported, but they kind of talk about how they uh how they arrived at this.
• 24:16
  SPEAKER_04: And um there's a forward-looking aspect of this.
• 24:22
  SPEAKER_04: And and I think that's another place where materials can get better is that they're not so much historical, but they're thinking about, you know, what what's around the corner.
• 24:32
  SPEAKER_04: And um and I think that's where really calling attention to audit committee members about what are the gray rhinos that you might have identified that could come charging at us should something happen.
• 24:43
  SPEAKER_04: So at least it looks like you know, it you are, and it gives the impression to the to the audit committee that you're thinking about what might be coming next and you're preparing for it.
• 24:53
  SPEAKER_04: Um so outside of uh outside of ERM, I would say that you know, two other areas that we're seeing a lot more discussion around, and and audit commitment members coming to us saying, hey, how do we oversee this?
• 25:07
  SPEAKER_04: Is uh I'll put them together, transformation, so you know, IT process transformation, and then MA activity.
• 25:14
  SPEAKER_04: Um, you know, maybe companies had some MA activity last year, but probably for the couple years before that, you know, hadn't seen much.
• 25:21
  SPEAKER_04: Right.
• 25:22
  SPEAKER_04: Um, oversight of MA, oversight of transformation will typically fall to the audit committee.
• 25:28
  SPEAKER_04: And and so I think to our audience, I would say, hey, the you know, the kinds of things that they want to know about that I think management should be informing them about it is is what is the impact to again our processes and controls in the area of, well, in the area, both of them, there's a talent aspect, certainly in transformation.
• 25:48
  SPEAKER_04: There's a talent aspect.
• 25:50
  SPEAKER_04: Do we gonna we need to hire new people?
• 25:52
  SPEAKER_04: Are we gonna need to let people go?
• 25:53
  SPEAKER_04: Do we need to upskill people?
• 25:55
  SPEAKER_04: What does that look like?
• 25:56
  SPEAKER_04: Um, culture, both of those have changes on in culture, and culture is so important when when you're thinking about oversight uh as a director.
• 26:08
  SPEAKER_04: And then two two final things.
• 26:09
  SPEAKER_04: What just how are we measuring success with either one of those activities?
• 26:13
  SPEAKER_04: Really, like what are those key KPIs and and and then what are they?
• 26:18
  SPEAKER_04: Like what what are the the you know the results?
• 26:21
  SPEAKER_04: What do they look like and how do they compare with what we were looking for?
• 26:25
  SPEAKER_04: And then I would say finally, um, and and I you know I saw this much when I was serving clients, but that oversight of these things ended when you either went live or you closed the deal.
• 26:37
  SPEAKER_03: Right.
• 26:38
  SPEAKER_04: And um and that reporting about any of those issues that I described really needs to continue for, say, 12 months, maybe even 18 months, depending on the size of the activity.
• 26:49
  SPEAKER_04: And and and again, it doesn't have to be an actual big discussion, but through dashboards and a couple of comments and an executive summary, you can communicate those messages and it keeps them in the loop about, you know, how are these things going?
• 27:05
  SPEAKER_04: So those are two big ones for sure.
• 27:07
  SPEAKER_01: Yeah.
• 27:07
  SPEAKER_01: I mean, I think change is hard with any organization, right?
• 27:10
  SPEAKER_01: And those are areas of change.
• 27:11
  SPEAKER_01: And to your point, if you've identified KPIs and then you can track those going forward, to your point, it's it's showing are we effective in how we managed whatever this change activity is, and then you can see that prove out over time.
• 27:24
  SPEAKER_04: Exactly.
• 27:24
  SPEAKER_04: And I think management teams need to understand the directors are hearing that they need to be asking questions like that.
• 27:30
  SPEAKER_04: And so you might as well just be prepared for it and giving them that information.
• 27:35
  SPEAKER_04: Um, you know, in the cybersecurity area, I would tell you it's it's um it's becoming more popular again.
• 27:42
  SPEAKER_04: So a couple years ago, cyber was the the big ticket item.
• 27:45
  SPEAKER_04: I'm probably the number one question we got was hey, how do we oversee this this uh this crazy risk, this rapidly changing risk?
• 27:53
  SPEAKER_04: And then directors started to get a handle on it.
• 27:56
  SPEAKER_04: Management teams, I think, start to feel comfortable.
• 27:58
  SPEAKER_04: At least I think that because we we were getting asked to talk about it less.
• 28:03
  SPEAKER_04: And then all of a sudden you see AI really come into play.
• 28:09
  SPEAKER_04: And so now folks want to know about cyber again.
• 28:12
  SPEAKER_04: And and really a couple of reasons.
• 28:14
  SPEAKER_04: One is because the the increase in in AI and use of large language models is creating, you know, one, uh, increase in cyber risk because those tools create opportunities for threat actors.
• 28:29
  SPEAKER_04: Um, but then they're also great tools for the management team to be able to identify those things.
• 28:34
  SPEAKER_04: So now directors really, their their appetite for learning more about, okay, how does AI impacting our cyber risk exposure, our programs for it, uh, who the new threat actors are, do we need another tabletop exercise?
• 28:50
  SPEAKER_04: Uh is our protocol for communication right?
• 28:53
  SPEAKER_04: Do we have the right, you know, you know, all those things are just really revisiting.
• 28:56
  SPEAKER_04: And I think it's important for our management teams to kind of, if they haven't already gotten ahead of that with the audit committee or the board, they need to do that.
• 29:04
  SPEAKER_04: Um we've talked a lot about just some of the uncertainties in in business and and making sure that that management is explaining how do these really relate to our company.
• 29:18
  SPEAKER_04: Some of them may not be an issue at all, but but you really want to inform the the audit committee about those things.
• 29:25
  SPEAKER_01: And I think that goes back to your enterprise risk management, too, is then it's that forward-looking, and also then the audit committee members, directors can have a good sense that management is being proactive in assessing what's going on, what's going on in the environment.
• 29:38
  SPEAKER_01: And to your point, where the areas of higher risk and opportunities.
• 29:43
  SPEAKER_04: Yep, yep.
• 29:43
  SPEAKER_04: You you nailed it.
• 29:44
  SPEAKER_04: You you should do, you should come over and work with me and our team.
• 29:49
  SPEAKER_04: Um, you know, maybe uh one one other thing that is starting to uh to get on our radar screen is just what what are we hearing about you know how companies may deal with the possibility that they can move away from quarterly reporting.
• 30:04
  SPEAKER_04: And I've had a couple of of chairs talk to me about that.
• 30:08
  SPEAKER_04: I I know some that are pretty proactive in conversations with management.
• 30:12
  SPEAKER_04: But we we did uh we we had our corporate directors exchange in Florida um in in uh in mid-January, and and and we polled 130 directors that were there.
• 30:25
  SPEAKER_04: And you know, while 60-ish percent said they're gonna stay with the quarterly reporting.
• 30:30
  SPEAKER_04: So clearly, I I think it I would assume from that that they have talked about that.
• 30:35
  SPEAKER_04: Uh about 20% said they're gonna move to semi-annual, but then there's still about 19% that said, yeah, we hadn't made a decision yet.
• 30:44
  SPEAKER_04: And I think there's there's an opportunity there.
• 30:48
  SPEAKER_04: I mean, there there's gonna be an opportunity.
• 30:49
  SPEAKER_04: You we're gonna get an opportunity to make a decision.
• 30:53
  SPEAKER_04: And and the issue is, and I hope that that that uh these kind of discussions are happening.
• 30:59
  SPEAKER_04: So it's not just whether we're gonna go to semi-annual reporting or not, but it is okay, if we did that, um, what does that mean about quarterly?
• 31:08
  SPEAKER_04: So are we gonna put out a quarterly press release?
• 31:10
  SPEAKER_04: If we do that, what's what what is the impact on controls and processes?
• 31:16
  SPEAKER_04: Like are we is it gonna be the same that it always was?
• 31:19
  SPEAKER_04: Are we gonna have our external auditor come in and still do some things?
• 31:23
  SPEAKER_04: I mean, there's a lot of trailing kind of discussions and decisions that need to be made if you're gonna decide to go that route.
• 31:31
  SPEAKER_04: And of course, one question I would ask if I were an audit committee member is what what are our peers doing in this regard?
• 31:38
  SPEAKER_04: So I just think if if there's again, about 20% said they they hadn't made a decision yet.
• 31:44
  SPEAKER_04: So maybe there are discussions going on, or maybe it's that's the companies where management needs to be getting in front of the audit committee and talking about those kinds of things.
• 31:52
  SPEAKER_01: Yeah, and I think to your point, you know, there's what are investor expectations, right?
• 31:56
  SPEAKER_01: So that what are peers doing?
• 31:57
  SPEAKER_01: I think there's a lot of conversations that need to occur with stakeholders as well as part of that.
• 32:02
  SPEAKER_04: Yes.
• 32:03
  SPEAKER_04: Yeah, that's a great point to understand what stakeholders would like to see.
• 32:09
  SPEAKER_04: So the last thing I've got in terms of uh important topics, and and I tell my team, you know, this is always going to be on my list.
• 32:17
  SPEAKER_04: And and I think directors share this, so I think management teams need to be focused on is just what's going on in the talent area.
• 32:24
  SPEAKER_04: Um, with all of the kind of change that we're talking about.
• 32:28
  SPEAKER_04: You know, do we have the right skill sets?
• 32:31
  SPEAKER_04: And and while talent is I'll get some directors say, oh, well, that's you know, the comp committee deals with talent.
• 32:37
  SPEAKER_04: And then you kind of dig in a little bit and you say, well, do you really think the comp committee is dealing with staffing of internal audit department, or who are the top finance and accounting people, and how are we making sure that we're keeping them?
• 32:50
  SPEAKER_04: Um, do do we, you know, do we have holes that we need to fill, or do we have competencies that we need to go get in in important departments?
• 32:59
  SPEAKER_04: And even for the audit committee, it it's about you know getting with the external audit, making sure, I mean, that's part of your oversight of the quality of that team is understanding.
• 33:08
  SPEAKER_04: I mean, granted, you get to meet the partner and maybe a director every quarter or so, but but is I I've had audit committee chairs tell me they really value asking to meet with some of the team members and that that's an important part of the quality assessment that they make in in their oversight role.
• 33:25
  SPEAKER_04: So, you know, those are some of the other hot topics.
• 33:28
  SPEAKER_04: I know it's a long laundry list, but we get them all the time.
• 33:31
  SPEAKER_01: Aaron Powell Well, that is a a long list.
• 33:33
  SPEAKER_01: So are there any other key areas that you would highlight for management teams as they think about how to support the audit committee and effective in their oversight?
• 33:42
  SPEAKER_04: Yeah, I I uh I mean I appreciate that.
• 33:45
  SPEAKER_04: And I I've wrestled with just even putt making these things part of the list, but I I call this the basic blocking and tackling.
• 33:53
  SPEAKER_04: And and because we can we can often, because of the complexity and the you know, the shiny lights around some of those other topics that that we've discussed, I think just dealing with things around, hey, what's going on in financial reporting?
• 34:08
  SPEAKER_04: Right.
• 34:08
  SPEAKER_04: You know, what's going on in compliance, what's going on in fraud prevention and detection, those are core oversight responsibilities of the audit committee.
• 34:16
  SPEAKER_04: And and I think that that's where management really needs to look for ways to um have in some of these, maybe it's one time a year where you're spending 10 or 15 minutes, you know, I don't know, but you're spending a little bit more time.
• 34:32
  SPEAKER_04: But then every other meeting, then there's some sort of a status report, you know, or some data that's that's put out there, whether it's how many um uh if it's the whistleblower hotline and and just what are we doing in terms of identifying these things, where do they fall or rank?
• 34:50
  SPEAKER_04: And again, w without a whole lot of red stuff, you probably just can report it and move on down the road.
• 34:55
  SPEAKER_04: But like I said, I think those are key.
• 34:58
  SPEAKER_04: Maybe just in the financial reporting area for a second, you know, there will be, there are some new disclosures that are being made, um, some to come in the next year or so.
• 35:09
  SPEAKER_04: And and just remembering that those likely have some impact on process.
• 35:16
  SPEAKER_04: Um, once you begin utilizing some AI in some of your controls or whatever, that has an impact on process.
• 35:24
  SPEAKER_04: And so those are things that management needs to be raising to the audit community.
• 35:28
  SPEAKER_04: Those will be changes.
• 35:30
  SPEAKER_04: And what I usually talk to to directors about in terms of oversight, you know, you you you get you get up the learning curve, you you understand foundationally what's going on, and then every year you want to know what's different.
• 35:42
  SPEAKER_04: Right.
• 35:42
  SPEAKER_04: What's changed.
• 35:43
  SPEAKER_04: And I think management teams can just be very proactive in getting that out there for them.
• 35:48
  SPEAKER_01: Yeah, I think that's super important.
• 35:49
  SPEAKER_01: And I as with everything, it's all intertwined too.
• 35:53
  SPEAKER_01: And as you mentioned a little bit, I mean, I think we can see more changes coming from the regulatory environment, the accounting standards, et cetera.
• 35:59
  SPEAKER_01: So continuous change.
• 36:01
  SPEAKER_01: So it's something you can't just talk about once and and move on.
• 36:04
  SPEAKER_01: Exactly.
• 36:05
  SPEAKER_01: So maybe looking a little bit ahead to after year end, I know you often talk about public company audit committee disclosures, which is something that management teams are involved in and probably starting to focus on as they're preparing their year-end reporting.
• 36:18
  SPEAKER_01: What are some of your perspectives on this topic?
• 36:21
  SPEAKER_04: Well, I um we we do we do talk a lot about how the company tells its story.
• 36:28
  SPEAKER_04: Proxy is one of those places where they get to kind of tell their own story, whether it's about who's on the board and the competencies that they bring, why they should be directors, uh certainly discussion, a different kind of discussion about some of the success or failure of the company during the year.
• 36:46
  SPEAKER_04: Um I would say uh risk oversight is still in there, you know, how they think about uh the oversight of risk where it sits between the board and the different committees.
• 36:58
  SPEAKER_04: And um and and you know, if well the the the proxy historically, and this goes back, you know, maybe say uh before about four or five years ago, it was really just a compliance document.
• 37:13
  SPEAKER_04: I mean, I remember talking with a lot of general counsels about possibly making some changes, and they're like, nope, we don't need to do that.
• 37:20
  SPEAKER_04: You know, we we don't need to get out in front of anybody else on this stuff, we just need to comply.
• 37:26
  SPEAKER_04: And then you had um the voice of the stakeholder get very powerful.
• 37:31
  SPEAKER_04: And so um with without some regulation, even companies started volunteering about telling more about their story, being more transparent.
• 37:41
  SPEAKER_04: Right.
• 37:41
  SPEAKER_04: And so when I talk with audit committee members or chairs or other directors, I usually say, you know, you have a chance to write your story and not have somebody else tell it for you.
• 37:51
  SPEAKER_04: And and so in the proxy, you've got you've got uh probably a risk oversight section that says what each committee is responsible for.
• 37:59
  SPEAKER_04: You know, their charters are on the website, their public documents.
• 38:03
  SPEAKER_04: And um and and and then you've got uh the the agendas, you know, which which are not public documents, but but I think there's an opportunity for management teams to kind of reconcile um what are we saying in the proxy about risk oversight?
• 38:19
  SPEAKER_04: How does that compare with what's in the charter, and then how does that compare with what we're really doing in the meetings and making sure that all those dots are connected, because oftentimes they're not.
• 38:29
  SPEAKER_04: And um, and so that reconciliation I think is something that that management teams would benefit in terms of doing, being proactive about it, and sharing that with directors.
• 38:39
  SPEAKER_04: Um I also think in the in the proxy there's an audit committee report.
• 38:45
  SPEAKER_04: So really that that requires there's a section where the audit audit committee is saying, you know, that we we recommend or we've decided to appoint our auditor.
• 38:57
  SPEAKER_04: Um and and in some proxies that's four sentences long or something, you know.
• 39:04
  SPEAKER_04: It just says what they did.
• 39:06
  SPEAKER_04: Doesn't say why.
• 39:08
  SPEAKER_04: And and you know, we had a period there where a lot of stakeholders were were saying, well, why do you think you want to stay with that audit firm?
• 39:16
  SPEAKER_04: Why are you recommending them?
• 39:19
  SPEAKER_04: And what we have found is um for a couple the last couple years, well, leading up to 2023, there there was each year some significant increase in some of the transparency around that process in the the audit committee report.
• 39:34
  SPEAKER_04: The last two years, not so much, but we're we're at about 50% of the SP 500.
• 39:40
  SPEAKER_04: That speaks to the why are we recommending that auditor?
• 39:45
  SPEAKER_04: You know, they they have the right industry background, they understand our processes and controls, they are in the places where we do business.
• 39:55
  SPEAKER_04: Um their fees are are uh uh represent value for us.
• 40:01
  SPEAKER_04: Um we we have input into who their partner is and and how that changes.
• 40:08
  SPEAKER_04: And um, and even that their tenure is seen as a positive because they know us as well as we know ourselves.
• 40:17
  SPEAKER_04: Right.
• 40:18
  SPEAKER_04: And um and if you don't, you know, some companies don't say any of that stuff.
• 40:22
  SPEAKER_04: But for the ones that do, uh I I've I've had several you know CFOs ask about how do I respond to these stakeholders, and our answer has always been tell your story in your proxy.
• 40:34
  SPEAKER_04: And and in you know, all of those cases, there's no questions anymore because you've explained it to the public.
• 40:42
  SPEAKER_04: So, you know, I I don't think every general counsel would be real happy with that suggestion of mine, and I understand that, but I think it's it's a great opportunity to take credit for what you're doing.
• 40:53
  SPEAKER_01: And how you've thought about it.
• 40:54
  SPEAKER_01: Exactly.
• 40:55
  SPEAKER_04: Exactly.
• 40:55
  SPEAKER_04: So I I usually try to point them to that.
• 40:58
  SPEAKER_04: Um we still do see a lot of skills matrices, you know.
• 41:01
  SPEAKER_04: Here are our directors, here are the competencies that they have.
• 41:05
  SPEAKER_04: Um, I think about 90% of the S P 500 has a skills matrix.
• 41:09
  SPEAKER_04: So if you're listening and you're in that 10% of a dozen, maybe think about why.
• 41:13
  SPEAKER_01: Yeah, why why don't you want to share that?
• 41:15
  SPEAKER_04: Exactly.
• 41:16
  SPEAKER_04: I I think just kind of working through, uh, and this is the right time to be thinking about that proxy.
• 41:23
  SPEAKER_04: So working through that and and um and for management, understanding what your peers are doing, because we tell, again, we tell directors, ask your management teams, how does how does your position compare to our peer group?
• 41:36
  SPEAKER_04: So knowing that, and of course, there's AI tools out there that can help you very quickly kind of figure out uh what peers are doing and maybe even some suggestions around disclosure.
• 41:47
  SPEAKER_04: So a lot of stuff there.
• 41:49
  SPEAKER_04: And and the CAQ, the Center for Auto Quality, does a transparency barometer every year.
• 41:54
  SPEAKER_04: And so we'll often point directors that we talk to or even management teams to go look at that transparency barometer because a lot of good information in there about disclosure trends.
• 42:05
  SPEAKER_01: Okay.
• 42:06
  SPEAKER_01: A lot of information out there that you can look to.
• 42:08
  SPEAKER_01: You got it.
• 42:09
  SPEAKER_01: Okay.
• 42:09
  SPEAKER_01: Well, this has been a great conversation.
• 42:11
  SPEAKER_01: But as we wrap up, what are one or two key takeaways that you leave our listeners with about how management teams can strengthen their engagements with those charged with governance?
• 42:21
  SPEAKER_04: Well, I certainly wish that um I had something, you know, new and enlightening to share with you, other than some of the crazy stuff we've talked about.
• 42:30
  SPEAKER_04: But but maybe I would just come back to where we started.
• 42:34
  SPEAKER_04: And and and because it's probably not the place that a lot of people think I should invest my time, but but there is so much going on.
• 42:42
  SPEAKER_04: Um directors have big challenges in terms of executing their oversight, they're concerned about it.
• 42:48
  SPEAKER_04: And I think a trusted, um, deep relationship with management that you feel really comfortable about the folks that you're working with, you know, allows uh between the you know, the audit committee or directors and management, good, candid, robust discussion that uh, you know, is great for stockholders, stakeholders, um, and management directors alike.
• 43:16
  SPEAKER_04: So focus on those relationships.
• 43:18
  SPEAKER_04: Okay, got it.
• 43:19
  SPEAKER_01: Well, thank you so much for joining me today, Stephen.
• 43:21
  SPEAKER_01: This has been a great discussion.
• 43:23
  SPEAKER_04: Thanks, Diane.
• 43:23
  SPEAKER_04: It's been great being with you.
• 43:26
  SPEAKER_02: That's our show for today.
• 43:28
  SPEAKER_02: Tune in next week for more fresh episodes so that you never miss any of our audio content.
• 43:34
  SPEAKER_02: Follow the PwC Accounting Podcast wherever you listen to your podcast.
• 43:38
  SPEAKER_02: And to stay up to date on all our latest accounting and reporting news, sign up for our newsletter at vete at PwC.com.
• 43:50
  SPEAKER_02: I'm Heather Horn.
• 43:52
  SPEAKER_02: Thanks for tuning in.
• 43:59
  SPEAKER_00: This podcast is brought to you by PwC, all rights reserved.
• 44:03
  SPEAKER_00: PwC refers to the U.S.
• 44:05
  SPEAKER_00: member firm or one of its subsidiaries or affiliates, and they sometimes refer to the PwC network.
• 44:11
  SPEAKER_00: Each member firm is a separate legal entity.
• 44:14
  SPEAKER_00: Please see www.pwc.com slash structure for further details.
• 44:21
  SPEAKER_00: This podcast is for general information purposes only and should not be used as a substitute for consultation with professional advisors, including accountants and lawyers.