The audit committee is set up to oversee a company’s financial accounts and reporting. It is made up of independent members of the board of directors. In order to produce reports that are accurate and have high integrity, the audit committee must include at least one board member that has knowledge in finance or accounting.
Having an audit committee is essential for good company governance. An audit committee that is working effectively can ensure the market investors and the health of the equity markets are well protected.
Here, we will discuss in detail the key roles of the audit committee in corporate governance.
1) Needs to be well-versed with relevant acts
The audit committee must be well-versed with the relevant acts and regulations that affect the reporting process of the company it works for. This also includes acts that deal specifically with the role of audit committees in publicly traded businesses.
To maintain the integrity of the auditing process, such acts will usually require that all committee members are independent directors. By doing so, shareholders will be assured that all necessary measures have been taken to prevent insiders from influencing the committee’s and external auditors’ work.
2) Reviews financial reports prepared by management
It is vital that the board of directors consist of members who can give a broad range of competent viewpoints based on their experience and skills. However, when it comes to the audit committee, it is imperative that the chosen board members must also be educated and fluent in financial and accounting terminology.
This is because members of the audit committee will need to know how management produces and reports internal financial information before they can begin their work. It is only by reviewing this internal information that the audit committees will be able to inquire regarding the accuracy, completeness, and timeliness of those reports.
Besides, audit committee members will only be able to understand the impact of the financial statements and the audit reports if they have a solid grasp of the financial language and accounting standards.
Therefore, every board of directors must have at least one director with a financial background. The director does not need to be a financial expert, but he or she must be familiar with financial concerns and have a firm grasp of accounting standards, auditing, and the financial language.
3) Appoints auditor
The audit committee is in charge of appointing and monitoring the independent auditors for the company. Since the audit committee has the authority to hire independent auditors, it also has funds set aside for the auditor’s services. Therefore, the budget for the independent auditor’s remuneration is likewise overseen by audit committees.
4) Oversees annual audits
The audit committees are responsible for providing appropriate oversight of the yearly auditing process. When the majority of the audit committee members are independent and impartial, they do the highest quality job.
Not just that, the audit committees are also in charge of supervising the company’s internal control system and ensuring that it complies with all applicable rules and regulations. IT security and operational issues are also under the scrutiny of the audit committee.
At the end of every audit, the audit committees will meet with the management and the external auditors to discuss the audit findings. The audit committee’s main responsibility also includes an evaluation of serious accounting and reporting concerns.
5) Works directly with auditors
Audit committees have greater authority than the majority of other types of committees, making them distinct from other committees. This is in the sense that audit committees have autonomy over their budgets and the management of external auditors due to their unique connection with them and the importance of their responsibilities.
The audit committee of a company that has an internal audit function will also examine and approve the internal audit plan and staffing and provide insight into the company to formulate a better audit plan.
Internal auditors and management also meet with the audit committee regularly for periodic assessments. The audit committee may suggest alternative audit procedures and discuss with the internal auditors on any concerns or issues and how best to coordinate the audit during these assessments.
With the intention to safeguard investors, the audit procedures are devised to give shareholders confidence in the company’s financial reporting. Concerns regarding financial reporting, accounting, and internal controls raised by the auditor must be properly addressed by the board by having relevant remedial measures in place.
6) Ensures confidentiality before the publication of the company’s reports
The audit committee meets with management and external auditors to discuss the findings of an audit, including items that must be reported to the committee under the applicable auditing standards. The committee is responsible for the controls over operations, financial reporting, and the security of information technology systems.
Since the audit committee fulfills some of a board’s most important responsibilities by dealing with the external auditors, it must ensure that it keeps the audit process private until the financial reports have been properly examined and are ready for public publication.
If needed, the audit committee should hold separate meetings with external auditors to examine issues that the committee or auditors think should be handled discreetly. This is to ensure confidentiality of the matters discussed so that any material information will not be leaked to the public prematurely.
All members of the audit committee should be independent to prevent insiders from influencing the committee’s work and oversight, as well as the work of the external auditors. No matter which industries the organisation is in, it should always try its best to commit to the same audit committee transparency and organisational standards.
Why? The reason is that all businesses, regardless of industry, are subjected to the same risk of accounting fraud and conflicts. Therefore, they must fulfil the same independence and financial expert standards to instil shareholders’ confidence. They should inform investors as soon as possible to warn them of the risk of management influence on the audit committee if it is not possible for them to fulfil such independence requirement.