An audit committee can play a very important role in a company’s corporate governance policy. Any company in Ireland may set up an audit committee, however the Companies Acts do indicate that ‘public interest entities’ such as banks, insurance companies and companies with shares quoted on a stock exchange must have an audit committee.
What Is An Audit Committee?
The audit committee is a committee of directors, appointed by the board to oversee financial reporting and related matters. The work undertaken by the audit committee is ultimately the responsibility of the board as a whole.
Members Of The Audit Committee
The board should ensure that the audit committee consists of directors who are knowledgeable and competent in financial matters, have adequate independence and are not afraid to challenge management. The audit committee of a public interest entity must contain at least two independent non-executive directors of the company. It is recommended that members should rotate periodically.
Main Responsibilities Of An Audit Committee
An audit committee’s terms of reference will detail the committee’s responsibilities and work processes. The main responsibilities of most audit committees are to:
- Examine, monitor and review the process to produce financial statements; internal controls, risk management and internal audit arrangements;
- Work with the internal auditor and the external auditor to ensure that the company’s financial statements reflect its financial position fairly and accurately; and
- Monitor and review how the external auditor completes their work and recommend the appointment of the external auditor each year.
There are many responsibilities which an audit committee undertake. The responsibilities will vary depending on the size and the nature of the business of the company. In addition, developments in corporate governance and company law can affect the role of the committees. For example it has become increasingly common for the audit committee to have a more involved role in the evaluation of the performance of the CFO. Also, audit committees are now typically tasked with the supervision of fraud, misappropriation and whistle-blowing systems.
How Does The Audit Committee Conduct Its Work
The committee appoints a Chairperson to run the committee and its meetings. The committee should meet regularly during the year and at the very least should meet before the audit begins, when the draft financial statements have been prepared and after the audit is complete. The Company Secretary usually arranges for the relevant reports and papers to be circulated to the committee and prepares the minutes of the meetings. It is usual for the committee to prepare a work program at the beginning of the year and a report on their work at the end of the year.
Evaluating The Audit Committee’s Performance
Since the committee’s main task is to review and make evaluations, it is important that the committee remains independent and carries out it duties correctly. Many companies engage independent advisors to help evaluate the committee’s performance.
Independence & Expertise
An audit committee can play a very important role in a company. In order to be effective and constructive, an audit committee must be made up of the correct type of people and should be run efficiently. The most important characteristics of an audit committee are independence and expertise. With increasing focus on good corporate governance, boards of active companies should consider the appointment of an audit committee.