What is an audit committee?
An audit committee is a committee of a company‘s board of directors that is responsible for overseeing the financial reporting process, internal controls, and audit activities.
The audit committee is responsible for ensuring that the company‘s financial statements are accurate and reliable. The audit committee also reviews the company‘s internal control systems and monitors the external auditors.
An essential component of good corporate governance is the role of the audit committee.
In both the for-profit and the not-for-profit world, the impact of accounting scandals and the distribution of finances can be immense, so the audit committee’s role will be crucial in preventing such events.
Having an audit committee helps provide accountability and oversight.
Read more: Directors will be responsible for audit mistakes.
What is an audit committee?
The specific Companies Act in your country should be consulted regarding the requirements for audit committees.
For example, companies with a certain turnover, generally in the millions, must set up an audit committee or explain why this hasn’t been done in the director’s report.
If the balance sheet total and turnover of the company and its subsidiaries taken together, for the relevant periods, meet the size thresholds set out above, then this would indicate the requirement to set up a committee.
An exemption may exist for some companies which fall below the criteria described above and with less than 250 employees in the last financial year.
Read more: A quick guide to audit committees.
What are the duties of the audit committee?
The committee must monitor the process around financial reporting and the effectiveness of the company’s internal controls. They must review the company’s financial statements, and they must observe the independence of statutory auditors.
Regarding statutory auditors, the committee should make recommendations to the board regarding their appointment, and any matters arising from the statutory audit should be reported to the committee. This would include any weakness in internal controls.
Read more: The massive audit scandal at Wirecard.
Who can be a member of the committee?
At least one of the committee members should be a non-executive director who is independent of the company, so they should not be involved in the day-to-day management of the business or have had any relationship with the company in the last three years. They should also have competence in auditing or accounting.
The audit committee should also have a chairperson selected from among its members. This person ensures the effective operation of the committee. The committee prepares its report each year on its activities, which would be part of the annual report.
When choosing members for the committee, it is essential to select individuals who can be independent enough to avoid being influenced when it comes to any difficulties for the company in question.
Read more: What is an auditor?
Audit committees need to have the right information
It is a requirement for all PLC’s or public interest organisations to set up audit committees. This would include banks and credit institutions, and insurance companies.
The company secretary should arrange for any relevant information to be provided to the committee to carry out their duties. The company should cover any costs in terms of legal or accounting advice.
The committee should meet at least three times a year, and at least one new director should be appointed every two years, and committee members may be paid or unpaid.