The 7 Deadly Sins of Audit Committees

Common pitfalls for board members

As the expectations on audit committees are raised, and as they come under more and more regulatory pressure, it’s increasingly important that board members understand some of the common pitfalls that audit committees can fall victim to.

To help, Top 25 Firm ParenteBeard has compiled a list of the “Seven Deadly Sins of Audit Committees,” based on research and feedback from its third annual Audit Committee Forum, which was held in late November 2012.

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1. Haste  1. Haste

Committee members, who are groomed to be problem solvers, pride themselves on being quick to decipher puzzles and make decisions. Speed, however, does not trump the value of a well-thought-out solution. Haste in solving the problem often prevents sufficient time to effectively define and look at it through various frames of reference (e.g., regulators, investors, analysts).

2. Rigidity  2. Rigidity

Committee members often deem problems to be binary decisions—they must accept or reject. Viewing the decision as binary without understanding the root cause of the problem often leads to missing alternative solutions that may be more effective. Once rigidity in thinking is loosened, committee members often learn that the best options come from alternatives that live in shades of gray.

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3. Naiveté  3. Naiveté

Committee members’ decisions can often be highly influenced by how a solution is framed. Members must adopt a skeptical mindset when hearing proposals, as naiveté can cloud the issues. It’s important to look at proposals through objective lenses and resist peer pressure. Otherwise, members may miss other possible solutions.

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4. Hubris  4. Hubris

Committee members are experienced professionals, and that experience breeds confidence. Confidence, however, tends to grow more rapidly than experience. Conducting the research necessary to make a seasoned decision tends to be skipped over by members who are overconfident in their expertise. This hubris can lead to a failure to properly define the problem and identify the fundamental objectives, which can lead to an incorrect solution.

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5. Stubbornness  5. Stubbornness

People tend to stick to their first preference or opinion, leading some decision-makers to seek out only supporting information that confirms their original premise. Stubbornness can cause members to ignore disconfirming evidence and different rationales. Open minds create more fruitful dialogues, resulting in more possibilities.

6. Assumption  6. Assumption

This is the tendency to assume that the first stated monetary value is accurate, even if it is not. Board members may then use this initial number when making future decisions. This can ultimately lead to misguided solutions and conclusions. Often the initial monetary value is determined based on experience, history and industry data, which may not be factually relevant to the specific situation.

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7. Complacency 7. Complacency

This is the tendency for members to rely on their memory to make decisions, rather than conducting proper research for alternatives. When faced with situations similar to what they’ve seen before, members tend to fall back on past experience for the current decision, even if the situations are fundamentally different. Learning is a lifetime commitment, and complacency can prevent finding the best solutions.

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