Finance teams and audit committees: Building a stronger dialogue

0:02Hello, and welcome to PwC's accounting podcast.

0:11Today we're looking at how a fast-moving risk and regulatory environment is reshaping the Audit Committee agenda and how finance teams can help keep Audit Committees informed, focused, and prepared for what's ahead.

0:42Hi, I'm Heather Horne. Today we're looking at how a fast-moving risk and regulatory environment is reshaping the audit committee agenda and how finance teams can help keep audit committees informed, focused, and prepared for what's ahead. With AI, cybersecurity, geopolitical uncertainty, and regulatory change all competing for attention, that means going beyond updates on what's already happened. Audit committees increasingly need timely information, thoughtful scenario analysis, and focused discussions that help them understand the risks and opportunities in front of the business. For this episode, we're sharing a conversation from our recent quarterly accounting webcast where Kathy Nealand, a partner in PwC's Governance Insights Center, sat down with Laura Hay, an experienced board director and audit committee chair.

1:32Laura shares her perspective on what's changing on the audit committee agenda, what boards need from management, how AI is shaping boardroom discussions, and how companies can help their audit committees navigate the risks and opportunities ahead. We've received such great feedback on this conversation from our viewers on the webcast that we wanted to also share it with our podcast audience. Before we get started though, I want to make a quick plug for our quarterly accounting webcast. If you like what you hear today, there's more of this each quarter. We bring together Pw specialists and prominent external guests to share diverse perspectives on the latest developments in accounting and reporting together with timely insights to help you prepare for the reporting cycle ahead.

2:14You'll find a link to the webcast landing page in the show notes or sign up for our newsletter at viewpoint.pwc.com so you never miss any of our webcasts, podcasts, or other thought leadership. With that, let's watch the video. Thank you, Laura, for joining us today and taking time out of your very busy schedule. You're a seasoned board member. You serve as the audit committee chair for two global companies, and you also serve on the audit committee board of a public, what is it called? It's a new term for me. An insure tech. An insure tech. So you've got some great perspectives to share with us today.

2:54Given that you've got such extensive of exposure to global risk and uncertainty. My first question is really about what's top of mind for audit committees. So given today's uncertainties, how has the agenda changed as you see it? And more broadly, what are directors actually concerned about now and why? Well, thank you for inviting me to join you on this conversation. You know, in the year 2000, Alan Greenspan coined this phrase, the fog of uncertainty in his speech about technology and productivity. And then later in his 2007 memoir, he was talking about risk management and evaluating probabilities and tail risks rather than relying on precise point forecasts or just trying to predict the future perfectly.

3:42So here we are a quarter century later, the fog is still there. And so your question about, well, what's different? The volume of different things colliding, the pace of change, and the complexity around the fog of uncertainty, all of that really informs how we think about the audit committee agenda. And it really demands a more thoughtful approach. You know, we have the must-haves, right? The CFO, the chief accounting officer, internal and external audit, reviewing the financials and the control environment. But what else? You know, cybersecurity is popping up on most audit committee agendas, whether it's in the audit committee or in another committee like tech or risk, it often falls in the audit committee.

4:25AI is often on the agenda, but I want to stress not just from a governance perspective, but how actually is the company using it? How will it impact the financials as it relates to audit committee? How will it change things in the future? And third is really more real-time information is key, especially given this fog of uncertainty. We need that more real-time information. And I think this is going to be a difficult transition, but it really applies everywhere in the audit committee agenda. Laura, that's very, very insightful. I think management feels the stress of the times as well. And I know that committees and boards depend on management to keep you up to date with what's top of mind, what those issues are, what items will impact the company's strategy and the overall risk profile.

5:15So how has reporting from management evolved over the last several months? And how do you see the needs going forward in this changing environment? Well, let's come back to the uncertainty theme. It's critical not just to focus on predicting the future based on one path. Companies are using more and more models to inform their planning. And what we know about models is that they're never correct, right? They require a volume of assumptions. So what we're thinking about is more scenarios, more real-time analyses to start to consider in the future for planning processes. AI can be a powerful tool to help with different scenarios, generating the different scenarios, et cetera, and running the scenarios.

6:03But also board directors can provide some outside-in thinking as well when you're coming up with the scenarios. I think this really pushes the companies to provide more options to be discussed in the boardroom. So coming to the question of what I like or what I don't like, what I like is management coming to the board with a more open discussion to, you know, bringing some views, facts and circumstances. But no one has all the answers. But what really needs to improve are really less presentations in the boardroom, less reading of the slides, more investment in providing helpful pre-reads. Because ultimately, it's the dialogue which is the most important and where everyone benefits.

6:47Perfect. So I heard scenarios. You'd like to see multiple scenarios and an understanding of what those mean. And probably more transparency in the conversation because you've got pre-reads there. So that's very, very helpful. Now, again, those materials are really important. Management spends a lot of time preparing them, and there's a lot of effort going in. What is most helpful for you as you're looking through them to understand the issue and the items that are most important to be discussed once you get in the room? Yes. Let's talk about what great looks like for pre-read materials. I think it's a combination of five things.

7:25The first is bios. Remember, the board members don't see the members of management frequently. It's quarterly at most, unless something comes up. And so every speaker that's coming to the audit committee or the boardroom, try to remember to include their bios. You don't want to waste valuable time during the board meeting going through their backgrounds. The next is executive summaries. Now, many companies have executive summaries, but it's often one executive summary for the whole committee meeting. Think one to three pages for each topic being discussed where you're highlighting the key points, the important takeaways, highlighting the key risks.

8:06Now, the detailed materials, the third one, is where I think many mistakes happen. More is just not better here. You need to arm the board with the information to understand the issues, understand the relevant details, the pros and cons of any issues, along with the risks. And it's really important to highlight the key points along the way in the detailed materials. More is not better. The fourth is the slide deck. You know, sometimes companies don't include the actual slide deck they're presenting, but that should be included as part of the materials as well. But remember, keep it minimal and please don't read from the slides.

8:44And then the last one is clearly identifying actions that are highlighted, any resolutions already prepared. Most boards do a pretty good job of that. But that's the big five, sort of the must-haves, what great looks like having all of those. But there are a few other things I'd like to also focus on, like external materials. Supporting publications or alternative views from external parties, I think, are very helpful for the board members. External speakers, don't be afraid. Topics like cyber or AI or even an external firm on strategy day to go through industry trends. And finally, don't forget about competitor information.

9:23It's very helpful. I'll give you an example here. You know, the latest SEC proposal on semiannual reporting, it was great in our last audit committee to have that competitor information there as we were talking about it in our audit committee meeting. That's very, very helpful. I like the bios. OK, that's something I've not seen. And so I think that's a takeaway that the audience here can absolutely act on very quickly. And then the structured approach to the information. Love that. The executive summary for each area and actually having that consistent. One of the best in class committees that I've sat in does an incredible job of a structured approach.

10:01And it really does enable the committee to execute very, very well. So thank you so much for those observations. Those were great. Okay, so next question. We are ready for the, I call it the hot topic of the Governance Insight Center, and it's AI. All right, everyone's talking about AI. When we are asked to actually come into committees, we're asked to talk about governance around AI. But probably what's also transitioned a bit is the transformational opportunity that you have with AI. So with that, okay, on your respective boards, what is the nature of the discussions you've had? What's been on the agenda to date?

10:37How have they evolved over the last several months? And where do you think they're going to go as we look into the remainder of 26? AI is mentioned in every single meeting. Sometimes it's at the committee level. Sometimes it's at the full board meeting. Personally, I think it belongs everywhere. In other words, I'm not a big fan of delegating all of the AI work and thinking to just one committee because it really is part of the entire fabric of many, many companies today or becoming part of the fabric. In one of my recent audit committee meetings, for example, we dedicated 40 % of our time just to AI in internal and external audit.

11:19We were trying to understand the impact on workflow, the impact on training, impact on the quality of the audit, you know, moving from more sample to full population, for example. And we saw several live demos of how these things are changing. Then we had a full discussion, the audit committee, about what are the changes coming in the future. And with any technology change, about 70 % of the effort is really around people and processes. And so understanding that aspect of AI as well as just the AI itself. On one of my other boards, they set up an optional lunch and learn for all the board directors.

11:55The goal was to teach us how to build an AI agent. So, you know, boards are starting to get educated. But just to share with you some of the typical AI board level questions that I'm hearing, here's some examples. One, how do we move from operational efficiency and productivity gains to value creation and growth? I mean, let's face it, the board wants to know that, but the companies want to know that as well. Another question, how do we get a handle on the true cost of AI? And then how do we prioritize its usage in the organization? everybody's, you know, at first it was AI everywhere, and now it's, we really do need to think about the usage and categorize that usage based on the skills and capabilities of the individuals and the talent in the organization.

12:43The third, of course, is how do we measure the ROI? It's a tough one, but every board member is asking, how do we govern through all of this within the organization? And then how do we protect against an AI-driven or enabled cyber event? These are just some of the typical questions. It is an exciting time as you look forward and we look past at what we've been through. It's truly going to transform how we think about business models, how we think about our workforce. It's just it is an incredible time. So thank you very much for those insights. OK, so risk. So we talked about your perspective.

13:20You've got a tremendous amount of knowledge on global risks. What would you say the greatest risks are that boards are really focusing on today? And what would you like to hear from management more frequently in response to those risks that you see? You know, boards are facing an increasingly volatile environment where the traditional oversight of the board has to balance this fast moving technology, the macro instability and heightened or unpredictable regulatory demands. So I'll go through five, today's my big five day. So five core risks that have been challenging the director agendas today.

14:00The first one has to start with AI, AI governance and execution. So it's about shifting from AI experimentation to full operational execution. And that poses some strategic risks around value delivery, resource allocation, and workflow disruption. but it also creates some emerging risks around data integrity, model hallucinations, for example. So AI, both governance and execution, is probably the first one. The second one, you can't ignore cyber. You know, when you go to these board events that I get a chance to go to, cyber is always one of the top three risks on every company's agenda that I've seen.

14:41So it's cybersecurity and digital exposure. You know, there's a much more sophisticated threat landscape with cyber attacks, ransomware, data loss, supply chain vulnerabilities, third party risk management, which I think is a really big one as well. And just the escalating AI driven threat. So cyber overall, we're watching. You know, the third, though, is the macroeconomic volatility combined with geopolitical friction. So what do I what am I talking about? You know, big words, right? navigating persistent inflation, unpredictable interest rates, shifting capital deployment strategies, and then the general macroeconomic deceleration or uncertainty.

15:24And then you add to that the friction, the geopolitical friction around trade barriers, tariffs, localized conflicts, shifting global policy. What does all that mean? It really means that geopolitical risk is now more of a continuous operational dependency rather than just an ad hoc crisis. That's the level it's raised to. The fourth risk is around leadership, leadership pipeline and succession bottlenecks. So deferred CEO and executive succession plans, creating a bunching of aging leadership tenures, and that leaves companies exposed to some sudden talent vacuums or activist campaigns. The last one, and I'll come back to your question about them, what does it mean, is regulatory burden, compliance, and ESG backlash.

16:13And really what I'm talking about here is for global companies where I'm serving on these boards, you've got evolving international and domestic reporting rules that they might conflict from time to time around data governance, AI, and climate disclosures, just really creating this compliance overhead. You put on top of that the politicized stakeholder dynamics around some of the debates on ESG. So taking those five risks, and those are industry agnostic risks, what we need from management is to really speak about the totality of the risks, prioritize them from their perspective, run scenario analysis, develop action plans or playbooks, and then simulate some of these risks to ensure that the playbooks are kept up to date.

17:01You know, one of the important learnings about the pandemic was the correlation impacts. Traditional actuarial models around pandemics really focused on mortality only. But what we learned was that the correlations around the economy, the supply chain, workforce transitions, these were new learnings. So as we think about scenarios, I know I've talked a lot about scenarios today, they really require broad thinking around the correlations as the models are enhanced and broadened. Laura, thank you. I love the comment on simulations. You often see simulation on business continuity, perhaps cyber response, but there's a lot more there that actually can be tested with the management team.

17:43So great observations, all of them, but in particular, I really like the observation on simulations. Okay, so last question. We only have a couple minutes here. What are the one or two takeaways you would want our audience to think about as they think about preparing in the future for their audit committee and board meetings? So I'd like to break this into near term and longer term. In the near term, of course, we're all paying attention to the SEC's agenda and proposals. And we're also paying attention to the outcomes of the midterm elections and the potential impacts on macro risks and variables.

18:16We can't ignore these items. But longer term, a few more thoughts to consider. First, in the audit committee, there should be a decent balance between backward-looking discussions and forward-looking. It's very natural to spend quite a lot of time on backward-looking, but really we need to all force the forward-looking discussions if they're not happening in the audit committee meeting. The second is when management is presenting an idea, make sure to ask, what were the options considered but not selected and why? trying to move away from just one path to scenario-based thinking. And lastly, I would say own your own learning path.

18:51Do some outside research on key topics. Read about your industry, but also broader topics like quantum, which is undeniably around the corner. Be a lifelong learner. That's what we need from our board members and our C-suite execs as we all face into the fog of uncertainty. Laura, thank you so much. Excellent observations. Thank you so much for taking the time. spending that with us today. Thank you.