ON April 24 the Institute of Internal Auditors Philippines (IIAP) and the Institute of Corporate Directors (ICD) sponsored the AuditCom and CEO Forum to discuss the topic “The AC, CEO and IA—PARTNERS In STRENGTHENING CORPORATE gOVERNANCE.” The panel of speakers included: Juan Alfonso—president and CEO, LRMC; Jose R. Soberano III—president and CEO, CLI; Marivic Espano—chairman and CEO, P & A Grant Thornton; Roberto Manabat—member, audit committee, ICD and chairman emeritus, KPMG R G Manabat & Co.; and Wilfredo Paras—independent director, Philex Mining.
Discussion focused on the relationship between the CEO and the audit committee and how this drives them to implement corporate governance principles, identifying key areas to achieve the company’s vision, making services available to clients, encouraging innovation, and doing things right. Quality means branding, being known in different markets and the business community. A CEO has to challenge himself, recruit the right talents, identify plans and strategic objectives, look at risks such as cyber security and competition from new players and set the tone
at the top.
On the other hand, the audit committee is the “first among equals”—it is the gatekeeper in the financial reporting chain. The audit committee and the internal auditor provide oversight on financial reporting and over the external auditor, especially with the new standards in financial reporting, such as those for revenue accounting and how revenues are booked. As well, the effects on systems and review of contracts are their concern. Effective January 2018 there are new rules on revenue standards which the audit committee must be aware of. Likewise, effective 2019 leases have to be considered in the balance sheet as leasehold rights have value and should be so recorded.
Critical judgments regarding financial statements should be assessed by the AuditCom, which must make clear judgments. Such discussions should be made not just on the regular AuditCom meetings, but perhaps, as well in what may be called “in between” meetings before the AuditCom reports to the Board. The internal auditor is the workhorse of the AuditCom. It is also important that there be collaboration with the external auditor as this would help the AuditCom to make better judgments for its report. One observation that was made is that Board meetings do not give sufficient time for the AuditCom to report—this is critical and is not merely a pro-forma part of the agenda.
The CEO, the chief audit executive and the audit committee should significantly collaborate especially when the internal audit plan is formulated. Ask about strategy…ask about risk. Know which has the highest impact on the internal audit plan.
The CAE needs to have managerial courage to do the right thing. In the interest of high ratings for corporate governance, there is the danger of losing focus and concentrating on the idea that “we have to do this so we can get higher governance points” (i.e, which can be splashed in headlines in the papers). Documentation is important. Apropos this, it may be proper to use a third party audit tool when going to the CEO when something has
to be done.
Indeed, the CEO and the audit committee are partners, meaning that they are peers. Strengthening the relationship is a dynamic process and should always be ongoing.
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