Open communication, face-to-face exposure, accountability: These are just some of the tenets of an effective relationship between the corporate controller and the audit committee. But after reading a couple of articles on what audit committees want from CFOs, I was curious to find out what audit committees expect from controllers.
So, I asked a handful of controllers what they thought those expectations are’.
“The audit committee should expect the corporate controller to be knowledgeable, trustworthy, and to keep the audit committee informed,” said Timothy Sangiovanni, CPA, vice president/corporate controller at Coralville, Iowa-based KemPharm Inc. “The corporate controller should be able to answer or quickly research the audit committee’s questions and respond to the inquiry in a timely manner. Trust in the controller is critical. The audit committee should also expect that the controller will keep them informed of matters pertaining to the committee, whether it be new accounting standards, industry trends, or audit findings.”
“The audit committee is looking for strong leadership from the controller on’ accounting, reporting, and control matters,” said Robert Ott, CPA, senior vice president and corporate controller at TE Connectivity, which is based in Schaffhausen, Switzerland. “They want clear, concise, and complete communication on significant accounting, reporting, and control matters. The audit committee wants and needs to be involved in significant decisions.”
Are they right? Are these the qualities audit committees want a corporate controller to possess? To find out, I asked three current and former audit committee members—Otis Baskin, PhD, Wendy Schoppert, and Lynn Turner, CPA—to weigh in.
Based on my conversations with Baskin, Schoppert, and Turner, as well as those with corporate controllers, these five qualities or expectations emerged:
1. Excellent communication. Ott was right; audit committees do want clear and concise communication—both written and oral—from the corporate controller on issues pertaining to the accounting and finance function of the organization.
“While the CFO may be the primary spokesperson for the financial affairs of the firm, the controller will be the primary leader of the accounting team and therefore responsible for communicating organizational goals downward and translating technical and human resource needs upward,” said Baskin, a consultant with the Family Business Consulting Group and a former director and audit committee member for EMRISE Corp. “For example, the ability of the audit committee to respond to a comment by outside auditors that the accounting function is understaffed requires profound process knowledge that only the controller may have.”
Turner, a senior advisor in the Forensic and Financial Consulting Services Group of Hemming Morse LLP who has served on a handful of public company boards and audit committees, said he has always tried to establish a policy of transparency and “no surprises” with the company’s CFO and controller. And it may come as no surprise that “no surprises” is one of the most common requests audit committees ask of a company’s finance leaders, according to a CFO Insights from Deloitte.
“If [the CFO and controller] bring an issue to the audit committee with suggested solutions, then the audit committee is responsible for dealing with it. But if an important issue is not brought to the attention of the audit committee and the committee is then surprised by it, then there will not be a rock large enough for them to hide under,” said Turner, who served as chief accountant of the Securities and Exchange Commission from July 1998 to August 2001, during which time the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees was formed.
He added that there has to be open, two-way communication among the three parties of what the Blue Ribbon panel called the “three-legged stool”—the board of directors, including the audit committee; management; and the external auditor—that supports responsible financial disclosure and active and participatory oversight.
“Without it, the audit committee cannot function,” Turner said.
Schoppert, who serves on the board of directors and audit committees of several public companies, including The Hershey Co. and Big Lots Inc., said she appreciates finance leaders who share with the committee “the top few issues we need to understand, including seeing around the corner on issues that may impact us down the road.”
“I respect [the controller’s] perspectives, coming from the person in the room who is typically closest to the drivers behind the integrity of the financial statements,” she added.
From a controller’s viewpoint, responding to a message from a board member is always considered a high priority.
“If it’s not something that I can respond to same day, I’ll let them know the timing within which I expect to provide a response,” said Brian Harding, CPA, vice president, corporate controller, and principal accounting officer at Wilsonville, Ore.-based FLIR Systems.
David Lloyd, CPA, vice president, corporate financial controller, and treasurer of Greif Inc. in Delaware, Ohio, said he is expected to come to the audit committee with a balanced and objective point of view.
“As controller, I’m expected to be able to provide a fair assessment of when we’ve made ‘middle of the fairway’ decisions on accounting issues and those circumstances where we may have been more aggressive or where something is more of a gray area,” he added.
2. Integrity and honesty. Controllers must have high ethical standards, “with the DNA that compels them to simply do the right thing,” Schoppert said.
Baskin added: “The controller must understand the difference between proper procedures that are sustainable and financial practices that, while legal, may put the corporation at risk. Understanding the difference between keeping rules and doing what is right is a critical quality in a controller.”
And Harding has learned that audit committees don’t want things sugar-coated; they want the controller to tell the truth.
“Be honest about the challenges you face in the organization—whether cultural challenges, internal control gaps or recurring deficiencies, staffing/capacity constraints, or other matters,” he said. “Make sure you’re prepared to state your plan to address these challenges, rather than just dropping complaints without providing a planned solution.”
3. Firm grasp of technical accounting and finance topics. Because more CFOs nowadays have business and operational backgrounds instead of accounting acumen, audit committees expect the controller to be the leading expert on technical accounting matters and related policies.
“The corporate controller must be knowledgeable and well-informed on GAAP, and the worldwide internal controls and accounting systems of the company,” Turner said. “Those systems must be providing management of the company with the information necessary to manage the company on a daily basis, as well as generating the transparent information necessary for investors and for establishing the accountability of all.”
The controller also is expected to stay educated on emerging accounting topics and new standards, like revenue recognition and lease accounting, that may impact the company’s financial statements or disclosures, Harding said.
“Each Big 4 firm has quarterly publications on emerging topics, so it’s always a good idea to brush up on those before each audit committee meeting,” he added.
4. Strong leadership. Besides showing strong leadership on accounting, reporting, and control matters, the controller also must ensure that competent people are hired for their respective jobs in the accounting function, Turner said.
“The controller must exhibit strong team leadership, with the ability to hire the right people, provide them clear direction, motivate them, and hold them accountable,” Schoppert added.
5. Ownership of budgeting. Turner said the controller plays a critical role in the establishment of annual and longer-term budgets, and reporting of actual results against the budget, so as to establish accountability of management.
“It is important to the audit committee and entire board that accountability be established and monitored in a timely fashion,” he added. “The corporate controller should be measuring key performance indicators and reporting on those to management and the board.”