Risk Management

One Way to Ease Audit Committee Pressures

Consider bringing your controller and other lead finance employees to audit committee meetings.
Sarah JohnsonSeptember 1, 2011

Can you take the heat? The air in boardrooms has thickened in recent years, as outside pressures and demands have increased on directors, who in turn have passed their stress on to senior executives. For audit committees, that means CFOs often bear the brunt of increasingly tough questions and difficult conversations.

In fact, tensions between finance chiefs and audit committees may be one reason CFO turnover has risen in recent months, suggests Peter Gleason, managing director and CFO for the National Association of Corporate Directors. “A lot of the turnover of CFOs can be attributed to the inquiries that come from the audit committee and the pressure that’s put on CFOs,” he says.

Indeed, the churn rate of Fortune 1,000 finance chiefs rose to 6.8% in the first half of this year, compared with 4.5% for the same period in 2010, according to recruiting firm Heidrick & Struggles. Of course, the reasons for departures vary, but the constant unease in boardrooms likely hasn’t made CFOs any more willing to hold on to their job — or increased their ability to keep it. Only 38% of CFOs moved to a new role within the same company, according to the Heidrick data.

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The back-and-forth between CFOs and audit committees started to become more tense with the 2002 Sarbanes-Oxley Act, which mandated that every audit committee have a finance expert, according to Peter McLean, chairman of Korn/Ferry International’s Global Financial Officer Center of Expertise, which recently queried about 40 audit-committee chairs and CFOs about their relationships. This requirement upped the likelihood that sitting CFOs would hear harder questions.

And the queries have only intensified as regulatory requirements have increased, businesses have become more complex and global, and investors have seemingly become more demanding. All of these factors have complicated what CFOs and audit committees discuss. “There is clearly a push to go way beyond what is mandatory and talk about deeper issues around strategy, financing, capitalization, and risk,” says McLean.

Thankfully, according to McLean, CFOs don’t have to go through these dealings alone. Korn/Ferry suggests in a recent white paper that finance chiefs should “showcase their bench” to audit committees by bringing some of their staffers along to meetings. Employees to consider inviting should include divisional CFOs, controllers, treasurers, and chief auditors. Taking this extra step in board dealings can give the audit committee confidence in the CFO’s abilities as well as the people who support him or her. And it may alleviate some of the pressure the CFO feels from the audit committee. “This gives the audit committee exposure to the choices you’ve made in people, who you’ve put in key assignments,” says McLean.

Roy Templin, CFO of Whirlpool, is one CFO who follows this strategy. “They know me and my capabilities, but also need assurance that the team’s breadth and depth of talent is strong,” he told Korn/Ferry.

While the initiative to showcase finance teams to the audit committee may come from the CFO, it can also come from audit-committee members. “If a CFO isn’t being forthcoming enough, the board would probably request it,” says McLean.

Dennis Beresford, a University of Georgia accounting professor and audit-committee chairman of Legg Mason and Fannie Mae, says his peers should demand that the CFOs make their staffers available. “The information that the audit committee can gather from different people in the finance function can help them better understand what they hear from the CFO, in effect giving them more confidence that they are getting the ‘straight scoop’ from the person that they hear from most often,” he says.

Beresford cites another benefit to bringing more staffers to meetings: the additional exposure is “a great motivational tool” for finance executives, who will be able to broaden their skills, hear career advice from audit-committee members, and get feedback about their team, he says.