Topics for Your Upcoming Board and Audit Committee Meetings

With the U.S. presidential election looming, the condition of the economy is top of mind at quarterly board meetings. Inflation may have plateaued, and the Fed has signaled a pause in its efforts to control inflation by raising interest rates. At quarterly board meetings, other issues related to an organization’s internal functions may be considered.

Weaver, knowledgeable in advisory services, offers several topics to incorporate into your next board meeting to generate productive discussion and illuminate prospective opportunities as well as challenges. The following five questions can serve as a guide for your next board meeting, helping to secure your organization’s future from possible risks the future may hold.

1. Has the organization considered the potential effects of the elimination of certain provisions of the Tax Cuts and Jobs Act of 2017?

The Tax Cut and Jobs Act of 2017 made sweeping changes to corporate taxes, but many of these were temporary and scheduled to be phased out over five or more years.

One provision that is scheduled to disappear could affect shareholder value. The TCJA decoupled the tax brackets that apply to capital gains and qualified dividends from the brackets that apply to ordinary income. Although tax rates are unchanged, the separate tax brackets allow high-income taxpayers to determine their capital gains tax bracket with their capital gains and qualified dividends only rather than combining it with their ordinary income. Beginning in 2026, however, taxpayers must again determine their capital gains tax rates using their total income.

• Has the organization considered the impact that the sunsetting of this provision in 2025 could have on shareholder value?
• Has the organization considered accelerating dividends and/or share buybacks into 2024 or 2025 to provide a higher after-tax return to shareholders before the 2026 bracket changes?

The TCJA also allowed businesses to deduct 100 percent of the cost of eligible property immediately. Beginning in 2023, the deduction began a five-year phase-out. The bonus depreciation rate is 60 percent for assets placed in service in 2024 and will drop to 40 percent for assets placed in service in 2025. Companies can realize a significant tax savings by taking the higher bonus depreciation deduction for 2024. Even if an asset is not “placed in service” for GAAP purposes, it can still be eligible to be placed in service for tax purposes if it is “in a condition or state of readiness and availability for a specifically assigned function.”

• Is our organization considering accelerating investment into 2024 to take advantage of the higher bonus depreciation deduction?
• Has our organization analyzed whether assets that are not “placed in service” for GAAP purposes in 2024 can be placed in service for tax purposes under IRC Section 167?
• Is our organization monitoring the progress of the Tax Relief for American Families and Workers Act and its potential extension of the 100 percent deduction through 2025?

2. Is the organization preparing its internal audit function to conform with the new professional standards?

This year, the Institute of Internal Auditors (IIA) released updated standards that are scheduled to take effect in January 2025. These updates reflect an overall change in the role of the internal audit (IA) function in organizations of all sizes.  Depending on the maturity level of the IA function within the organization, conforming to the new standard may require changes to structure and governance.

• Has the organization assessed the areas that need to be addressed to conform to the new IIA standards?
• Has the IA function engaged an external, independent party to perform a Quality Assessment Review (QAR) within the last five years?
• Is the Chief Audit Executive (CAE) or equivalent providing an annual report to the Audit Committee on the results of the function’s internal quality assessment, as required by the standards?
• What steps is the CAE taking to strengthen and broaden the competencies and professional skills of the IA staff?
• How do these standards impact the organization as a whole?

3. Does the organization have an adequate succession plan for key positions?

One of the greatest risks to organizational stability is the loss of key personnel. A solid succession plan identifies individuals at all levels of the organization who can take over when the person above them departs. Mitigating the impact of a personnel loss requires multiple components to function effectively: recruiting the right people, identifying high performers, providing new challenges and quality professional development, mentoring those with high potential, and compensating them fairly.  Succession planning reaches beyond leadership levels, crossing all critical operational functions. Ask these questions:

• Within our c-suite, who is the most difficult individual to replace?
• Are you challenging our most talented employees by giving them opportunities to take on complex and critical projects? Do those opportunities lead to promotions?
• Are we getting the most out of our professional development opportunities? Is professional development tied to performance evaluation? Does it include cross-functional training? Mentorship?
• When was the last time we performed a compensation study comparing us to our competitors and our regional labor market?

4. Is the organization at risk due to its dependence on a “single point of reliance?”

If one individual can cause an entire process to fail, the entire organization may be at risk.  Organizational governance should mitigate against a single person with the access, knowledge, or authority to perform a critical action. Examples of a “single point of reliance” include having only one individual with access to an application critical to a process, knowing where key data is stored, or understanding critical equipment requirements. Ask these questions to assess where your organization faces risks related to a single point of reliance.

• Has our organization performed a process review to identify areas where there is a high risk of a single point of reliance?
• Is there anyone in our organization who is the only individual performing a process or transaction, or the only one who knows how to perform a process or transaction?
• Is there anyone in our organization who has sole access to an application critical to a process or who knows where key data is stored?
• Is there anyone in our organization who is the only person who understands the critical equipment requirements and does not have equipment logs for reference?
• Is there any job or position in our organization currently being executed by contracted employees with significant responsibility for transactions or process execution that has not been shared in-house?

5. Has the organization adequately addressed AI-related risks, considering recent upgrades?

Regulators and industry leaders continue to provide guidance in the ever-changing landscape of generative AI, with recent upgrades now providing the ability to process voice, images, and text.  The National Institute of Standards and Technology (NIST) released the AI Risk Management Framework (RMF), as a voluntary framework to better manage risks.  On April 29, 2024, NIST released a draft publication to assist in the identification of unique risks posed by generative AI and propose actions for risk management.

• How has the organization addressed the risk of employees uploading confidential data via screenshots, images, memos, or other sources?
• What specific opportunities can the new enhancements provide in improving customer service and engagement strategies?
• Has the organization performed a comprehensive AI risk assessment, and has it considered using the NIST AI RMF?

Weaver offers information and insights to help you ask the right questions and determine appropriate plans of action based on topics and trends as they unfold. Subscribe to our monthly insights for articles and information to help you review your organization’s operations and prepare for change in an uncertain world. Contact us for information about these areas of Board governance.

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