Directors of companies are expected to have comprehensive knowledge of strategy, risks, operational activities, control frameworks and finances of their organisations. An effective board will utilise skill mix, board training and development, and the use of experts to assist them in fulfilling their governance responsibilities. This is particularly the case in regards to finances.
Most boards allocate significant time and resources to financial governance through approving forecasts and monitoring financial reports. This is appropriate from both an entity performance and sustainability perspective, along with directors fulfilling their fiduciary and legal obligations with regard to their many responsibilities in relation to taxation, financial records and solvency.
Seeking to improve
Unfortunately, most governance surveys, financial failures and legal proceedings, including the Centro case, indicate that many directors as individuals or boards as a whole, do not either:
have sufficient financial expertise or
adequately apply that expertise
in order to fulfil their responsibilities and appropriately oversee the organisation.
As boards consider how to improve their financial governance practices the most common responses are:
to bring additional expertise to the board by new director appointments and
undertake financial literacy and governance based training for existing board members.
These actions are entirely appropriate in many circumstances. Our recent "Financial governance for directors" seminar was fully booked out and well received by attendees who were seeking to improve their skills. Although the seminar primarily focussed on financial literacy and developing practical knowledge, it also highlighted other methods for a board to fulfil its financial governance obligations and mitigate director personal risk.
These methods may typically include:
Extending the scope of the financial statement audit to review and document the operation of key organisational financial controls, and then to develop a process for the board to obtain periodic confirmation and evidence of their operation.
Developing key policies in relation to electronic banking, credit card use, purchases and expense approvals, IT passwords, backup and security controls, credit approval and other policies that address key financial risk areas.
Implementing a structured "internal audit" process. Such a process can be highly tailored and scalable, enabling smaller organisations to implement risk focused reviews performed by either internal staff, outsourced internal auditors or appropriately scoped extension of the financial statement audit.
Introducing data integrity and fraud detection data mining processes. Such processes may be able to be imbedded into the organisation's system or be performed by an external service provider. The improved accessibility of data and the power and functionality of analysis tools has resulted in these techniques being cost effective for any size organisation.
Engaging assurance service providers to perform grant acquittals and financial statement audits or reviews, in order for directors to mitigate the risks and obtain independent expertise and assurance even though a legal obligation for such assurance may not exist.
Engaging an external accountant to undertake periodic review of the management financial reports and key accounting reconciliations. This can ensure the reliability of financial information provided to the board. This "outsourced CFO" service is increasingly popular for smaller organisations with an internal bookkeeper, seeking additional oversight and expertise without the ongoing cost of a higher skilled accountant.
Taking the time to consider the financial expertise of the board and its obligations is a process we recommend all boards periodically undertake.
We are committed to the assisting our clients improve their financial governance practices. We would be happy to discuss with you, the opportunities to improve these practices within your organisation.