Audit Committee: Roles, Responsibilities, and Best Practices
The Audit Committee
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Fundamental Role
The audit committee plays a crucial role in corporate governance with key responsibilities including:
- Overseeing the company’s accounting and financial reporting processes, including financial statement audits.
- Appointing, compensating, and overseeing the external auditor.
- Establishing procedures for handling complaints related to accounting, internal control, or auditing matters, ensuring confidentiality and anonymity for employees reporting questionable issues.
(According to Sections 205 and 301 of the Sarbanes-Oxley Act)
Appropriate Accounting Skills
The audit committee should:
- Understand the accounting complexities specific to the company’s industry, geography, and business practices.
- Ensure the quality and adequacy of accounting knowledge and skills within the company.
- Utilize internal and external audit assessments to evaluate accounting skills.
- Confirm management’s awareness of financial reporting risks, controls in place, and monitoring procedures for assessing control effectiveness.
Oversight of External Auditor
The committee ensures the external auditor possesses:
- Sufficient technical knowledge of accounting and the company’s industry.
- The capacity to handle the company’s accounting issues promptly.
- A service delivery model aligned with the company’s needs.
- The geographical presence to support the company’s operations.
The audit committee requires adequate resources, including the knowledge, skills, and time of its members, internal audit personnel, external auditors, and independent experts.
Accountability Relationship, Requirements, and Functions
- Composed solely of independent directors, typically three to five members.
- Members should meet minimum financial literacy standards, with at least one member possessing accounting or financial management expertise.
- Primary functions include overseeing outside auditor independence, internal controls and internal audit function, compliance with laws and ethics, critical accounting policies, financial statements, and communication between the board and auditors.
The Planning Function
The audit committee’s plan should encompass:
- Review and appraisal of the entity’s overall audit plan, including purpose, objectives, and resources, aligning with the committee’s charter and recommending audit goals for board approval.
- Review and consolidation of internal and external audit plans.
- Annual appraisal of the corporate audit plan.
- Adoption of a code of ethics for senior financial officers, promoting ethical conduct, transparency, and compliance.
The Monitoring Function
The audit committee should monitor:
- The internal auditing function.
- The internal control system and associated business risks.
- Financial reporting disclosures.
- Conflicts of interest, ethics audits, and fraud audit activities.
- Corporate perquisites and contributions.
- Information technology systems.
- Whistleblower protection, ensuring no retaliation against employees reporting potential fraud.
The Reporting Function
- The audit committee reports directly to the board of directors, providing an objective assessment of management’s accounting and auditing performance.
- Reporting aligns with planning and monitoring functions, with content based on review programs.
- Focus on matters such as financial accounting policies, industry practices, reports from independent and internal auditors, and legal counsel reports.