Understand the crisis’ impact on the company’s earnings, cash flow, liquidity and compliance with debt covenants, and monitor key indicators of trouble, he explains, during the course of a recent email interaction with Business Line.

“Recommend that the management assemble a taskforce to monitor the impact of the crisis on a real-time basis, and to develop (and stress-test) worst-case scenarios. A strategic response to this crisis is critical.”

Second in his list of priorities for audit committees is an assessment of the company’s exposure to third parties in financial distress. Mr Medora exhorts these committees, therefore, to ensure that the management is monitoring the impact of the crisis on the company’s key customers, suppliers, insurers, partners, banks, underwriters, counterparties and other third parties that may be experiencing financial difficulty. “An up-to-date inventory of the company’s potential exposure to third parties is essential.”

Excerpts from the interview:

On the financials and metrics.

Two tasks are essential in this regard: One, understand the impact of the economic crisis on the company’s financials — particularly the balance sheet. And two, focus on fair value and liquidity measures.

Understand the impact of the economic crisis on the company’s financials: Audit committees must focus on the company’s investment portfolio, including debt and equity securities, to identify declines in value or impairments that should be reflected in the financials. Help ensure that the management has identified possible impairments of goodwill, deferred taxes, patents and other intangibles, and that fair values determined by management and valuation experts are reasonable. Assess how changes in financial markets have impacted the valuation of pension plan assets and funding requirements.

Focus on fair value and liquidity measures: Understand the company’s disclosure processes of fair value accounting and liquidity issues — and how the application and impact of fair value accounting is described in the MD&A (management discussion and analysis) and other periodic filings. Consider whether the description of the company’s liquidity risks is sufficiently robust and specific to the company.

On information and effectiveness.

Audit committees should pay attention to information sources and improvement opportunities.

Expand the audit committee’s information sources: Consider whether the information the audit committee receives comes from a balanced variety of sources (versus relying too heavily on information from management), and whether the information flow promotes sufficient internal transparency (versus fragmented or partial views). Getting the right information is essential to providing effective oversight of the company’s financial reports, its risks and internal controls.

Take a hard look at opportunities to improve the audit committee’s effectiveness: Count on increased expectations for good governance and effective oversight, and focus squarely on opportunities to improve. Pay attention to basics — like having the right mix of committee member experience and skill sets, committee independence and leadership, an understanding of the company’s strategy and financial risks, and the adequacy of support for the audit committee. If you don’t get the basics right, your ability to ask the right questions and challenge management is severely limited.

On work at the board and top management level.

It is of utmost importance for audit committees to ensure that the discussions with the board are productive, even while preparing it for change.

Make sure your risk discussions with management are healthy and productive: With the benefit of hindsight and possible lessons from the economic crisis and recent events in corporate India, consider the adequacy and effectiveness of the company’s governance processes for managing risk (management’s processes and the board’s) and being sensitive to minority shareholders’ interests.

Be a catalyst in helping to pose the right questions, including: Can the management provide a holistic view of the company’s major risks — both on and off the balance sheet? Are the top risks facing the company understood and agreed upon? How rigorously does the management stress-test key risk assumptions? Are the board’s information sources sufficiently varied and objective? How does culture — including consideration for minority shareholders — impact the company’s risk profile?

Help the company and the board prepare for change: With the economic crisis and globalisation changing the world in dramatic ways (a less-leveraged economy, a restructured banking/finance industry, potentially more regulation and shareholder activism on issues such as corporate governance, executive compensation, new business models driven by diversification, technology, globalisation, competition — and more), step back and consider what the emerging business environment will look like.

Does the management understand how this new environment will impact the company’s risk profile, and the viability of its strategy and business model? And keep IFRS (International Financial Reporting Standards) on the radar; given the potential scope and scale of an IFRS conversion, and the impact on the company’s operations, have a clear understanding of the company’s IFRS transition plans.

D. MURALI

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