Finance & Audit Wants YOU!
Feb 13, 2022
Non-financial board directors are missing a huge opportunity by not serving on finance and audit committees. I know that sounds odd if you’re particularly averse to the numbers or believe that you don’t have an aptitude for them.
But take it from me - a non-financial director - participating on a finance and audit committee is a far more enjoyable experience than writing an accounting or corporate finance exam. There’s no last minute cramming or pulling an all-nighter. Instead, there’s a collaborative approach among team members to make the right decision on a financial matter that’s real - not a case study or a theoretical problem.
Today’s financial issues are more complex and forward-thinking than they used to be. The thoughtful, curious question that a non-financial director with good listening skills can bring to a finance committee meeting has the potential to move the discussion forward and ultimately produce a better decision.
CFOs are looking for wise counsel and advice from their boards, not accounting expertise.
Consider this perspective from a former CFO who is now the CEO of a major business – someone who appreciates the input of a non-financial director:
“Non-financial directors add value by keeping it real. Sometimes us accounting folk get lost in the minutiae, in the detail and we may need a hand getting out of there by non-financial directors asking, ‘So what?’. This can help ensure what we’re discussing remains linked to strategy - there’s such a thing as getting too into the weeds in the numbers too!”
For this edition of The Savvy Director, I set out to talk to over a dozen successful financial executives and board members with deep financial expertise – people who can appreciate and articulate the value of the non-financial director.
For example:
“The value that non-financial directors can bring is the different perspective. So many decisions made by boards and their committees are multi-faceted and this applies to the audit and finance committee. There are fewer purely financial decisions anymore and the perspective of other stakeholders must be considered. This is where the non-financial directors can bring this dimension to discussions at the finance and audit committee.“You do need financially literate directors on that committee, but having non-financial directors provides diversity and different points of view that could be critical to understand implications for the entire company or organization.” - Savvy Board Chair
Financial Literacy in the Boardroom
Being able to understand the financial accounts of an organization is an essential skill for all board directors. That makes you financially literate. You don’t need to be a numbers expert or deeply familiar with accounting standards and terminology, but you do need to have a basic understanding of the key elements of a Balance Sheet and Profit & Loss/Income & Expenditure Statement, along with the confidence to ask questions about areas that aren’t clear or give you cause for concern.
The good news is there are multiple ways to access this fundamental training. Many boards offer short sessions for new board members as part of their onboarding process.- All Global Network of Director Institutes (GNDI) offer financial literacy courses in their country.
- Reading financial statements: What do I need to know? FAQ - is available from the Chartered Professional Accountants (CPA) Canada.
- Non-profit organizations like BoardSource have downloadable tools and trainings to help with the basics.
- DirectorPrep’s affiliate partner Women Get on Board offers WGOB Financial Intelligence in the Boardroom, a program specifically designed to provide a solid grounding in finance fundamentals for women board directors.
And there are many more opportunities to enhance your financial literacy skills in the boardroom. Check online to find numerous offerings from reputable firms. The key requirement is your willingness to learn and embrace the value that comes with having increased confidence when preparing for the financial aspects of the board’s work.
Public Boards vs. Private Company and Non-Profits
Public company boards - those which are traded on stock exchanges - are typically boards with a higher level of financial disclosure requiring professional financial certification (e.g. CPA, CFA) and commensurate experience within audit committee positions, especially the committee chair.
To do the job, there are many compliance topics, regulatory requirements, and financial disclosures that require significant attention to detail. That’s why those directors are highly skilled, have years of experience, and are well compensated for the significant time and effort they spend helping to provide assurance that the financial reporting provided to the public and investors is accurate.
Yet, even on public company boards, there is still a role for the non-financial director on the audit committee, as long as they are financially literate.
“The financial statements, MD&A (Management Discussion and Analysis), and press releases are supposed to tell a story about the business. Non-financial directors are able to reconcile the story of the business to the story the financial documents will tell.” - Corporate Director, Audit Committee Chair
By the way, if you’re not sure about Management Discussion and Analysis (MD&A), it’s a section in the annual report or quarterly filing where executives analyze and report on the company's performance. It might also include a discussion of compliance, risks, and future plans such as goals and new projects. A fresh set of eyes from a non-financial director exercising oversight of the MD&A narrative can be helpful.
Private company boards come in all sizes, and many of the largest private/family-controlled companies have fiduciary boards modelled after the requirements of publicly traded companies.
Smaller company boards and those of start-ups may have the full board doing the work that, at a larger company, would be delegated to a finance and audit committee. As a non-financial director, your ability to connect the organization’s strategy to the budget and financial forecast can add great value to the discussion.
“In a certain way, not being a financial expert can be an advantage on a Finance & Audit Committee. Often financial experts on the committee can’t help themselves to avoid getting into the weeds with deep financial questions about certain key numbers or metrics.“As a non-financial director, you can focus on the most important element of the Finance and Audit Committee, namely the process. Focus on risk management policies and procedures, query about conflicts, ensure auditor independence, understand the relationship between auditors and management and being satisfied there are no major underlying issues such as disagreements on financial statement policies, management assumptions or presentations.” - CPA, CIO, Corporate Director
Non-profit boards with finance committees often have a wider mandate beyond audit and financial reporting.
“When I look at Finance and Audit Committee mandates, which in my experience are usually in private or non-profit organizations, the significant areas of the mandate are focused on the financial results (including budgets). There is little requirement for public financial disclosure issues and accounting principles are less complicated. There is less time spent on internal control issues, review of audit plans and results of the annual audit.“This type of committee is much more focused on the reporting of overall business results and less on the technical aspect of accounting and auditing principles. In this case committee members with a broader range of skills in all areas can be of significant benefit and provide valuable input during the meetings. - Public Company Director, Audit Committee Chair
Why This Matters To You
As a non-financial director, you have an important role to play on a finance and audit committee. In most cases, the board will recruit at least one director - and hopefully two or more - with accounting and/or finance backgrounds to ensure the technical aspects of financial oversight and external auditor independence. That opens up the opportunity for broader, more diverse thinking from the non-financial director.
As a senior partner in a major accounting firm shared with me,
“Diversity should never be underestimated in terms of its strength and value. Adding non-financial members can have a very positive impact on the dynamics of the finance committee (if for no other reason than often times many accountants are introverts and a non-financial person who is more extroverted may create an environment that encourages more discussion and participation.)"
There is power in asking the simple question. Sometimes significant issues have fundamental reasons that can be teased out with curiosity. A good questioning attitude – and the confidence to ask a ‘dumb’ question - can add value to the board’s consideration of ethics, conflict of interest, budgets, and risk management.
In smaller non-profits, the opportunity for situations of fraud and misappropriation are greater if there’s inadequate oversight and questions about internal control from financially literate directors. While your non-profit board may not have access to a veteran corporate director with a professional accounting background, basic financial literacy training for all directors can narrow the gap. Showcasing the benefits of your own training will help make the case for the board to invest in financial skills development for all directors.
As a non-financial director, the value you add to the work of the finance/audit/risk committee because of your broader view of current issues helps everyone. Cybersecurity is a good example, as noted by a senior partner in one of the big four accounting firms.
“Often times, an audit committee will think about the bells and whistles around systems to prevent an attack. However, someone who has been through it will think about resilience and business continuity. What to make sure to do when an attack happens, what should be the lines of communication, what to take care of first/priorities.”
You’ve got this. You have value to bring to these discussions because of the breadth of your lived experience and training.
“The non-financial director provides a different lens to assess risk. They encourage organizations to present information in a clear, concise, and easily understood manner by avoiding highly technical descriptions and analysis. This becomes a benefit to all board members who may have a big decision to make.” - CFO, Board Director
In situations where ethics, conflict of interest, and verification of investigative issues require future follow-up, a non-financial director who has logged a reminder in their calendar to inquire about how the issue was resolved may save the organization from reputational damage down the road.
In Summary
If you’re a non-financial director, the finance and audit committee is a great place for you because you can really get to know how the organization operates. Being part of a discussion on budget allocation and alignment with strategy is an important element of forward-thinking board work. The work is interesting and impactful if you take a holistic view of the organization’s purpose – why it exists and whether it has the financial resources needed to fulfill that purpose.
Don’t get me wrong. The traditional financial aspects of audit committee work are vitally important. There should be financially savvy directors on the committee to support its legal and regulatory obligations. But today the committee’s expanded role in oversight of risk, cyber security, data governance, and ESG provides opportunities for non-financial directors to learn and ask questions from a broader perspective.
If you bring to the table your curiosity, strategic thinking, common sense, and grit, you’ll surely add to the diversity of perspective for the committee’s work overall. Don’t hesitate to be part of it. See what you can learn that will become part of your director skills toolbox forever.
That sounds like a win/win.
Your takeaways:
- Non-financial directors needn’t shy away from serving on finance and audit committees. They have value to bring to the discussion beyond audit compliance topics.
- All board directors are required to be financially literate. Fortunately, there are many cost-effective opportunities for non-financial directors to learn how to read and understand financial statements.
- Today’s finance and audit committees are often assigned oversight of risk and cybersecurity - areas for which the full board is accountable and should be engaged.
- Finding a mentor on the finance and audit committee is a good idea for non-financial directors starting out.
- Being financially literate and having finance and audit committee experience will help you in your future board career.
Resources:
- Reading financial statements: What do I need to know? FAQ - Chartered Professional Accountants (CPA) Canada.
- Global Network of Director Institutes (GNDI) offer financial literacy courses in your country.
- BoardSource has downloadable tools and trainings for non-financial directors.
- WGOB Financial Intelligence in the Boardroom program.
Thank you to the many financial board directors, committee chairs, and board chairs who contributed their views to this article.
Leave a comment below to get in on the conversation.
Thank you.
Scott
Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online hub with hundreds of guideline questions and resources to help prepare for your next board meeting.
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Scott Baldwin, ICD.D
Co-founder | Director
Scott has served on boards and provided governance advisory services to boards since 2001. Private company, nonprofit and government agency boards have been his focus. He is now leveraging that expertise with his own director work while helping directors prepare for their board role so they can collaborate, contribute and influence decisions.
