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The Non-executive: Understanding the role of the audit committee chair

The role of listed company audit committee chairs in the appointment or removal of subsidiary company FDs varies widely. In many cases, possibly the majority, there is no involvement of the audit committee chair at all. But, in my experience, their engagement in such an issue is in the best interest of the business as well as the subsidiary FD.

It is clearly in an audit committee chair’s interest to have sufficient contact with the FDs of major operating subsidiaries – how much is sufficient is another topic – not only to enable the audit committee to discharge its duties in relation to reviewing internal controls and assessing the quality of the finance function, but also to facilitate effective two-way communication.

In cases when that is the only time those FDs ever meet the audit committee chair, dialogue is likely to be pretty stilted and, for the FD, may feel more like an inquisition than a meeting. Feeling under interrogation can reduce the effectiveness of their contribution, a contribution that is even more important when that subsidiary FD thinks they may have discovered inappropriate accounting or, worse, by their predecessor, for example.

In those circumstances, that FD may feel at best lonely, insecure and worryingly
uncertain over what to do next, especially if the messages from their group-level executives are not wholly supportive or even consistent. Having someone they can turn to without breaching confidentiality obligations is a godsend if they have not come across such a situation before; that goes for the FD and the board.

It can be difficult for someone in such a situation to assess whether the examination of allegations against them by the board amount to sensible questioning to get to the bottom of the matter, or pressure not to rock the boat. The state of denial people often get into in such circumstances can be quite extreme and very difficult to deal with; the worse the initial suspicions , the greater the chance of “it cannot be true” becoming the knee-jerk response.

An audit committee chair is likely to have seen this sort of thing before, by virtue of their experience, whether as an FD or as an auditor, for example. The committee will want to know that any allegations of wrongdoing are being properly examined and that evidence is not being lost. It may even have to provide moral support, as well as guidance, to the subsidiary finance director.

This is true whether or not the FD’s initial suspicions turn out to be well-founded. In the latter case, it is important that the FD doesn’t lose confidence in their own judgment and risk failing to properly follow up any future concerns that might crop up.

What if the FD discovers that the audit committee chair is of no help, or not up to it? You might say it is a bit late to discover that after joining the company, and even worse to make such a discovery after a problem has come to light.

That is why any candidate for the role of subsidiary FD should want to meet the audit committee chair as part of the recruitment process, as well as the executives – typically the subsidiary managing director and group FD – who run the process. Should you lose out because another candidate made a better, more informed judgment on these relationships, a good headhunter will ensure any messages of no confidence in any of the parties get delivered properly to the company.

That is why the company can also benefit from such an involvement of the audit committee chair in the recruitment process.

Eric Tracey is a chartered accountant and has served as FD for Wembley and Amey. He is a non-executive director, governance adviser and audit committee chair for various listed businesses in the UK and abroad. This column returns in July.

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