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When a Board asks “Why didn’t we know?”

Title plate of The Wonderful Wizard of Oz (not...

(Photo credit: Wikipedia)

In L. Frank Baum’s novel, The Wonderful Wizard of Oz, the title character is a mystery until almost the very end. The Wizard is a figment of everyone’s imagination, playing on their individual phobias until he is unveiled to be, well, quite ordinary. This analogy came to mind as I listened to the Chair of the Board speaking at SNC-Lavalin’s shareholders meeting earlier this month. Gwyn Morgan, in stepping down from the Board at this recently-troubled company offered some thoughts about the past tumultuous several months during which the former CEO has been arrested and a number of bribery investigations initiated. “Why”, he asked, “didn’t these errant actions come to the Board’s attention sooner?”

It is a good question, and one, I am sure, that is being looked at closely by the Company and investigators. Mr. Morgan offered up the view that “no Board [had] exercised its duties more diligently”.  Before we rush to condemn this statement as an exercise in self preservation, let us consider for a moment what this would mean, if true, to those of us whose job it is to talk to Boards about risk.

I sometimes hear the complaint among Chief Audit Executives that they do not get enough of the Board’s time.  Meeting agendas are crowded and the Audit Committee has a long list of duties to get through every quarter. Drafts of financial statements, press releases and public filings which can be tough going must all be intelligently devoured. So, when it comes time for the Chief Audit Executive to speak, just get to the point quickly. The CAE’s report has been forwarded to the Audit Committee in advance and there are no further questions. Discussion is brief.  So, what is missing in the approach by the CAE?

Here’s where the Wizard of Oz comes in.  In my experience, too many auditors approach the Board member in the same way that Dorothy and her companions approached the Wizard. There may be too much respect given because these are powerful people with little time to spend and none to waste. Your CEO may be sitting quietly in the corner, ready to “add color” to your comments should you stray.  There may be a presumption that we do not have to state the obvious because this would insult the deep knowledge and understanding that exists behind the curtain. For whatever reason, the CAE can fall into the trap of failing to speak plainly. 

To make sure we are not committing the sins of omission so lamented by Mr. Morgan, here are some thoughts from experience. First, save time for the important stuff by deciding what you do not need to discuss.  Avoid topics that are fully clear and that, in your view, do not merit further time on discussion, even if you shared material with them in advance.  This is a matter of judgment, so Audit Committee chairs really only have themselves to blame if they allow someone with limited experience talking to Boards to be their CAE.  Second, while you must know your facts – and use a few powerful ones in the discussion – do not present a narrative.  Get to the point quickly and effectively by making the result of the audit clear in day-to-day terms. When discussing the result of a very technical audit, I have for example said that “without X or Y in place all of our controls are rendered meaningless. As a result, we can never be certain that Z will not happen”.  Statements like these should never be mis-used because they will erode your credibility, but it is helpful to turn things quickly into simple statements that cannot be disputed.  You can get to the details later, as questions arise. This is an important performance for you as well as the Board, so practice what you will say.  It helps if, like me, you like to talk to yourself.

But what about the other side of the coin? Don’t Board members themselves have a duty here?  Is it really enough to rely on the “they-never-told-me” defense? Here again, I believe CAEs have a duty of education. Make sure your Board members learn the essentials of Governance by addressing them directly. This means discussing whether you believe ownership and responsibilities for key risk areas are in the right place, being able to objectively assess the competence of the governance owners and their teams, making professional conclusions on the effectiveness of monitoring and consultation systems and advising how well the company responds to issues as they arise.  Nothing promotes interest in Governance more than getting into the practical issues on a regular basis. Master the skill of discussing this in ordinary language, and you will fast become the new Dorothy.  At the end, even the Wizard listened to her.

About anthonyoreilly

I believe that organizations fail to get adequate assurance from their auditors and can both reduce cost while improving quality. As the Head of Professional Practices at Siemens, AG I played a leadership role in a major Corporate re-construction of a global audit function, from inside the engine room. After 10 years as a Partner in a Big Four firm, I was attracted by the opportunity of a turnaround challenge in one of the world's leading industrial companies. I moved my family to Germany and spent 4 years re-building this 450-person global audit organization back to health following a spectacular failure. I am attracted by challenge, cultural diversity and companies who are willing to put effort into it and get to the next level. I am not dismayed by resistance to change and seek to work with companies willing to invest in skilled people who want to advance their own careers while bringing the organization to new heights and reducing the total cost of operations. All of these things were accomplished in my time at Siemens. Prior to the role at Siemens, AG, I was a Partner at PricewaterhouseCoopers LLP, where I learned all I knew from the many challenging and professional clients I worked with. I am a published author and sought after speaker on Audit and Governance practices.

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