Conducting an Audit Committee Executive Session: Guidelines and Questions


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Purpose of This Tool. Although it is generally accepted that audit committees should hold executive sessions with various members of the executive management, leaders of the financial management team, the leader of the internal audit team, and the independent auditor, audit committee members may not realize the type of questions and the extent of the questions they should ask. This tool is intended to help the audit committee ask the right first questions, bearing in mind that the audit committee should have the necessary expertise to evaluate the answers and the insight to identify the appropriate follow-up question. See the Other Questions for Management section of this tool for possible follow-up questions audit committee members can ask key members of the financial management team to improve their understanding of the day-to-day operating environment and management teams' decision-making processes and interactions.

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What Is an Executive Session?

The purpose of an executive session is to ask questions of various members of the management team and the external auditors in a safe environment. During an executive session meeting, minutes are (usually) not recorded, and when meeting with members of the financial management team, anyone who is not a member of the audit committee is excluded from the meeting. Executive sessions should occur at every meeting of the audit committee, though not every individual needs be in an executive session at every meeting. For example, it may be appropriate for the chief audit executive (CAE), or equivalent, and the independent auditor to have an executive session at every meeting, but the director of financial reporting might be in executive session with the audit committee only at the meeting before the audit is accepted. The length of these sessions obviously varies depending on the issues that need to be discussed by the committee.

It is recommended that executive sessions be conducted with key members of the financial management team and external auditors on a one-on-one basis. It is important that, when meeting with the controller, for example, the chief financial officer (CFO) not be in the room. Executive sessions should be a matter of routine at every audit committee meeting, and not be done only on an exception basis. The audit committee should avoid situations of asking in an open session whether an individual has anything to discuss in an executive sessionthat question alone could put the individual in an awkward position with others in the organization.

Asking open-ended questions in an executive session could be a major source of information for the audit committee. This tool includes examples of the kinds of questions the audit committee should ask. These are meant to be sample questions to help start a conversation and create dialogue between the individual and the audit committee. These sample questions are not intended to be a checklist. Audit committee members need to have sufficient financial expertise to understand the answers to the questions and to use these answers to develop appropriate follow-up questions. Since it will not be unusual to ask similar questions of key executives, the independent auditor, and/or the internal auditor, a comparison of their respective responses could be a good source of insight. Depending on the answers, follow-up action may also be necessary, and the audit committee must be prepared to take that action. The most important thing to do when conducting an executive session is to listen to the answers that are given and follow up on anything that is not clear!

Note that the questions for the executive session are such that the participants may not feel free to answer honestly in the open environment of an executive session. Nevertheless, there may be other information that the audit committee wants to know. Following the suggested executive session questions is an associated section of follow-up questions, Other Questions for Management. An executive session may not be required for these questions, which nevertheless may elicit information the audit committee wants.

Audit committee members should also consider the history of the organization, the environment in which it operates, the current economic climate, the competitive environment, and other factors, when asking questions in executive session. Finally, each executive session should be concluded with a reminder to the member of management, that audit committee members are accessible even outside the meeting, and that they should feel free to reach out to the audit committee member at other times if the need arises.

It is important to note that not every organization will have different individuals in each position, as assumed in the following questions. Nevertheless, the audit committee should be aware of the functions that are part of dual roles, and adjust the questions accordingly. For example, in a small organization, the CFO and controller might share the duties of the director of financial reporting.

The audit committee should explore how a function or role is accomplished, and compose questions accordingly. Also, the audit committee should consider and take into account other roles in the organization. It may be that other people within an organization should also be asked to meet with the audit committee in executive session.

Instructions for Using This Tool.This tool is intended to help audit committees ask the right first questions, bearing in mind that the audit committee should have the necessary expertise to evaluate the answers and the insight to identify the appropriate follow-up question. Audit committee members may want to use the questions in the “Other Questions for Management” section in conjunction with this one to formulate and ask the appropriate follow-up question. As a reminder, not every organization will have different individuals in each position, as assumed in the following questions. Nevertheless, the audit committee should be aware of the functions that are part of such dual roles, and adjust the questions accordingly.

Conducting an Executive SessionSample Questions	Comments
Chief Financial Officer
1. Do you believe the financial statements and applicable federal and state filings fairly present the organizations financial position and activities?
2. Do you believe the disclosures are adequate and are understandable by the average reader?
3. Are you satisfied that an appropriate audit was performed by the independent auditors?
4. Are you aware of any situations of revenue or expense manipulation in the organization?
5. Are you aware of any kind of fraud in the organization? Do you know of any situations in which fraud could occur?
6. Is there any activity at the executive level of management that you consider to be a violation of laws, regulations, generally accepted accounting principles (GAAP), federal regulations (if the organization receives federal funding), professional, or accepted business practices?
7. Have you encountered any situations in which the organization complied with legal minimums of behavior, yet failed to demonstrate its commitment to the highest ethical standards?
8. Is there any activity in the organization that you are uncomfortable with or consider unusual, or that warrants further investigation?
9. Do you feel comfortable raising issues without fear of retribution?
10. Are there any questions we have not asked that should have been asked? If so, what are those questions?
Executive Director
Do you believe the financial statements, IRS Form 990, and Form 990T, fairly present the organizations financial position?
2. Do you believe the disclosures are adequate and are understandable by the average reader?
3. Are you satisfied that an appropriate audit was performed by the independent auditors?
4. Are you aware of any situations of revenue or expense manipulation in the organization?
5. Are you aware of any disagreements between management of the organization and the independent auditors? If any, please provide details of the disagreement.
6. Are you aware of any disagreements between management and the internal auditors? If any, please provide details of the disagreement.
7. Is there any activity at the executive level of management that you consider to be a violation of laws, regulations, GAAP, federal regulations (if the organization receives federal funding), professional practice, or the mores of business?
8. Have you encountered any situations in which the organization complied with legal minimums of behavior, yet failed to go the extra mile to demonstrate its commitment to the highest ethical standards?
9. Is there any activity in the organization that you are uncomfortable with or consider unusual, or that warrants further investigation?
10. Are there any questions we have not asked that should have been asked? If so, what are those questions?
Chief Audit Executive (leader of Internal Audit Team)
1. Overall, is management cooperating with the internal audit team? Does management have a positive attitude in responding to findings and recommendations, or is it insecure and defensive of findings?
2. Has management set an appropriate tone at the top with respect to the importance of and compliance with the internal control system around financial reporting?
3. Are you aware of any current or past occurrence of any type of fraud in the organization? Do you know of any situations where fraud could occur?
4. Are you aware of any situations of revenue or expense manipulation in the organization? Has the organization taken any tax positions that could be construed as aggressive?
5. Have you encountered any situations in which the organization complied with legal minimums of behavior, yet failed to go the extra mile to demonstrate its commitment to the highest ethical standards?
Do you have the freedom to conduct audits as necessary throughout the organization?
Were you restricted or denied access to requested information?
Have you been pressured to change findings, or minimize the language in those findings so as to not reflect badly on another member of management? Are findings and recommendations given the level of discussion needed to properly satisfy any issues raised, to your satisfaction?
Do you feel comfortable raising issues without fear of retribution?
Is there any activity at the executive level of management that you consider to be a violation of laws, regulations, GAAP, federal regulations (if the organization receives federal funding), professional practice, or the mores of business?
Are there any questions we have not asked that should have been asked? If so, what are those questions?
Controller
Do you believe the financial statements and IRS Form 990 fairly present the organizations financial position?
Do you believe the disclosures are adequate and are understandable to the average reader?
If you were the CFO, how would you change the financial statements and accompanying footnotes?
Are you aware of any current or past occurrence of any type of fraud in the organization? Do you know of any situations in which fraud could occur?
Are you aware of any situations of revenue or expense manipulation in the organization? Has the organization taken any tax positions that could be construed as aggressive?
Are you satisfied that an appropriate audit was performed by the independent auditors?
Are you aware of any disagreements between the management of the organization and the independent auditors?
Has management set an appropriate tone at the top with respect to the importance of and compliance with the internal control system around financial reporting?
Do you feel comfortable raising issues without fear of retribution?
Have you encountered any situations in which the organization complied with legal minimums of behavior, yet failed to go the extra mile to demonstrate its commitment to the highest ethical standards?
Is there any activity at the executive level of management that you consider to be a violation of laws, regulations, GAAP, federal regulations (if the organization receives federal funding), professional practice, or the mores of business?
Is there any activity in the organization that you are uncomfortable with or consider unusual, or that warrants further investigation?
Are there any questions we have not asked that should have been asked? If so, what are those questions?
Director of Financial Reporting
Do you believe the financial statements and IRS Form 990 fairly present the organizations financial position?
Are there any issues since our last meeting that you wish to discuss with the audit committee?
Are you aware of any current or past occurrences of any type of fraud in the organization? Do you know of any situations in which fraud could occur?
Are you aware of any situations of revenue or expense manipulation in the organization?
Do you believe the financial statements and related disclosures adequately convey the financial situation in the organization to an average reader?
Now that you have the opportunity, is there anything you want to tell the audit committee? Is there anything else that we need to know?
Are you aware of any disagreements between management of the organization and the independent auditors?
Do you feel comfortable raising issues without fear of retribution?
Is there any activity at the executive level of management that you consider to be a violation of laws regulations, GAAP, federal regulations (if the organization receives federal funding), professional practice, or the mores of business?
Is there anything going on in the organization with which you are uncomfortable?
Are there any questions we have not asked that should have been asked? If so, what are those questions?
General Counsel
Are you aware of any issues that could cause embarrassment to the organization?
Have you ever been told anything in confidence or otherwise that would embarrass the organization if it were known publicly?
Are you aware of any situations of revenue or expense manipulation in the organization?
Are there any items that have significant financial statement impact that you have discussed with the executive director, CFO or other officers, or outside counsel, that the audit committee is not already aware of?
Are you aware of any disagreements between management of the organization and the independent auditors?
Do you feel comfortable raising issues without fear of retribution?
Is there any activity at the executive level of management that you consider to be a violation of laws, regulations, GAAP, federal regulations (if the organization receives federal funding), professional practice, or the mores of business?
Have you encountered any situations in which the organization complied with legal minimums of behavior, yet did not go the extra mile to demonstrate its commitment to the highest ethical standards?
Is there any activity in the organization that you are uncomfortable with, consider unusual or warrants further investigation?
Are there any questions we have not asked that should have been asked? If so, what are those questions?
Chief Information Officer
Is there any activity in the organization that you are uncomfortable with or consider unusual, or that warrants further investigation?
Do you feel comfortable raising issues without fear of retribution?
Has management set an appropriate tone at the top with respect to the importance of and compliance with the internal control system around financial reporting?
Are there any items that have financial statement impact that you have discussed with the executive director, CFO or other officers, or outside counsel, that the audit committee is not already aware of?
Are there any questions we have not asked that should have been asked? If so, what are those questions?
Conducting an Executive SessionSample Questions
Independent Auditors
Note that there are certain communications that are required between the independent auditors and the audit committee. A separate tool, Discussions With the Independent Auditors: What to Expect, has been prepared for the audit committee to ensure completeness of the committees required communication with the independent auditors. These suggested questions are meant to be in addition to the required communications.
1. Explain the process your firm goes through to ensure that all of your engagement personnel are independent and objective with respect to our audit. Particularly, with respect to nonaudit services, how do those services affect the work that you do or the manner in which the engagement team or others are compensated? Are you aware of any anticipated event that could possibly impair the independence, in fact or in appearance, of the firm and any member of the engagement team?
Comments:



2. Has management, legal counsel, or others made you aware of anything that could be considered a violation of laws, regulations, GAAP, federal regulations (if the organization receives federal funding), professional practice, or the ethics of business?
Comments:



3. Are there any areas of the financial statements and the notes that you believe could be more explicit or transparent, or provide more clarity to help a user better understand our financial statements?
Comments:



4. Have you expressed any concerns or comments to management wit