An "Executive Session" Does Not Mean Every Executive Is Invited!

Richard Chambers, CIA, CGAP, CCSA, shares his personal reflections and insights on the internal audit profession.

 

One of the most significant developments of the internal audit profession in the past decade has been its rise in stature relative to audit committees. A decade ago, a chief audit executive (CAE) with a functional reporting relationship to the audit committee was considered a “leading practice.” Today, it’s the norm.

Along with enhanced reporting relationships have come a number of other practices reinforcing the value audit committees place on a strong, independent, and effective internal audit function. One of these practices has been regular and frequent “executive sessions” between the audit committee and CAE (WMV video file). The IIA has long recognized and advocated the value of executive sessions. The IIA’s Practice Advisory (PA) 1110-1 on organizational independence states that, “Functional reporting to the board typically involves … communications from the CAE on the results of the internal audit activities or other matters that the CAE determines are necessary, including private meetings with the CAE without management present …”

A November 2009 IIA Audit Executive Center Knowledge Report, Audit Committee Trends and Activities (PDF), went even further in asserting:

Presence of executive sessions with the audit committee. CAEs can increase the lines of communications with the audit committee by holding executive sessions. These sessions should be held at least quarterly or as needed to discuss items of importance between regularly scheduled meetings and to keep the audit committee apprised of issues as they occur. CAEs also can hold executive sessions during every regularly scheduled meeting to allow for an open discussion of management issues without the presence of other senior managers.

With the apparent universal recognition of the value of executive sessions, one would naturally conclude that these sessions are widely conducted in an appropriate manner. However, I am becoming increasingly concerned that this is not the case. I have spoken with several CAEs in recent months who have shared some troubling examples of abuses in the way executive sessions are actually conducted. The most alarming trend is the frequency with which other executives are being invited (or simply electing) to sit in on the CAE’s executive sessions with the audit committee. It is difficult to determine how widespread the practice of “executive session crashing” really is; however, even one is too many from my vantage point.

The most commonly cited executive session intruder is the chief financial officer (CFO). I am fairly certain that very few CFOs sit in on CAE executive sessions. However, I have heard enough examples cited in recent months to conclude that it is worth addressing. When these abuses occur, it would be easy to place all of the blame on CFOs. After all, they should know better, and would certainly not sit in on the executive session between the external auditor and the audit committee. However, I also have to question the logic of the audit committee in permitting outsiders to sit in on these sessions. Why host an executive session at all if there is not going to be an expectation of confidentiality or privacy associated with the discussions that unfold? As an audit committee member, are you willing to assume the risk that the CAE may possess knowledge or insights on risks and controls, or the behavior and practices of corporate executives, that the CAE is unwilling to discuss in their presence?

Ultimately, however, I also have to assess some blame on the CAE for permitting the faulty executive sessions to take place. I recognize that some CAEs are often caught in difficult situations. To object to the CFO or other executive(s) presence in the room during an executive session may be awkward or appear accusatory or defensive. In many instances, the practice of expanded executive sessions may have already been in place prior to the CAE assuming his or her role. However, holding executive sessions with other executives in the room serves no real useful purpose in my opinion. In fact, I believe it’s a dangerous practice that engenders a false sense of security.

If you are a CAE facing the challenge of reversing this practice, I suggest that you share a link to IIA Practice Advisory (PA) 1110-1 or this blog with your audit committee chairman immediately. Schedule a private conversation with the chairman and share some of The IIA’s guidance and thought leadership on this important topic. You will be doing your audit committee a valuable service if you point out to its members the risk they assume by not holding genuine executive sessions with you.
 

Posted on Jan 12, 2010 by Richard Chambers

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  1. I totally agree with Richards comments. There are a number of CAE's that I have interacted with in the past year that don't have executive sessions, or if they do, some representative of management is present, and all too often, so is the external auditor.  In my opinion, the CAE needs to meet with the audit committee in a true executive session, meaning  No One other than the CAE.  I also feel that audit committee chairman shares the responsibility to ensure that a true executive session takes place.  I am curently retired and no longer in the corporate world but when I was the CAE at my organization, if was my audti committee chairman that excused management and the external auditors so that they could speak with me in total privacy.  In that environment not only was I able to talk frankly but so was the audit committee.

  1. Couple of suggestions from first hand experience:

    1.  Have one session with the external firm partner, then another session with the chief internal auditor.

    2.  Make them a regular agenda item so no one has to suggest it be included.

    3.  Always clear the room and conduct the meeting even if it is just to report nothing to talk about.

    4.  If a lengthy discussion is required, schedule a meeting with the audit committee at another time so as to not raise alarms over a lengthy meeting.

    5.  As an administrative reporter to the CEO, I always discussed in advance with him (two different CEO's over 15 years) what I was going to discuss with the audit committee in private session.

    6. If anything that the CEO needed to know happened in the audit committee meeting, I was to interrupt him BEFORE the full executive board meeting started.  Outside audit committee members love to coach the CEO on how to better handle issues based on how well it is done in their respective organizations (CEO's really hate those discussions).

  1. I agree with Mr Chambers.Some of the CFOs when left to totally have their way,will actually insist on chairing the executive sessions of the audit commitees in the unlikely event of the chair being absent for obvous reasons.I suggest that the CAE should ensure that members of his/her audit commitee are updated on  the best practises

  1. As a member of several audit committees of organizations that have an internal audit function, I agree that there is considerable value in audit committee members hearing directly from the CAE without senior management present.   I encourage CAEs to bring this forward to their audit committee chairs as a matter of good governance.  I should though note that the committee meeting is merely the formal route to advise board members.   The informal conversations, dialog and healthy working relationship between the audit committee chair and the CAE is very important.  Alot of communication occurs outside of the committee meeting that is just as valuable.   So, its also about building a strong professional relationship between CAE and audit chair.    

  1. I agree that there is a great value on the audit comitee but it may need clarify with a few points .

    It is true that for the development of Internal audit proofession ,the existances of  Audit commitee is vey deciseve one. The compostion of  audit comitee memebrs knwledge should be more on finance ,audit and  a few other feilds other wise it is meaningless. Without the existances of internal auditor in the organization , there will not be an audit comitee. If it is happened , the cheif finance officers should be act on it.

    existances of audit comitee in the organization enhance the independency of internal auditor. The role of audit commitee is as a governace role of internal auditor .

    In the organization's starcture ,there is no a specific box or line  that shows the releationship of audit commitee.to the rest of other staff lines. To this effect ,we couldn't seen the clear role and responsibility of it.

          

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