Principles for Audit Committee Effectiveness
To create an effective audit committee, it is important to attract members with the necessary qualifications and abilities. Outlined below are some of the key attributes we believe are needed for an audit committee to run efficiently and effectively.
- Create the Right Tone at the Top
The committee should ensure that the ethical and compliance commitments of management and employees are understood throughout the company. The message to all personnel should be loud and clear: Financial misreporting is unacceptable. If any misreporting is noted, it must be dealt with quickly and appropriately.
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To remain objective in the fight against fraudulent reporting, audit committees must remain independent. It is not always easy to resist management’s attempts to interfere, but all major stock exchanges emphasize the importance of audit committee members being independent of company management.
- Reflect a Balance of Skills
An effective audit committee must have a number of members who are “financially literate.” This requirement stems from the need to have a range of views and expertise, as well as to be able to manage the workload required of audit committee members.
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Being an audit committee member is not a full-time job. However, committee members must be informed, diligent and probing. This means a significant time commitment is required. The amount of time devoted to committee work depends on the complexity of the company’s activities, its stages of evolution and the magnitude of its issues.
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To operate properly, a formal written charter strongly backed by the full board should be adopted and assessed annually. The charter should include important points such as:
- The scope of the committee’s responsibilities and how it carries them out.
- A statement that the external auditors are ultimately accountable to the board of directors and the audit committee.
- A statement that the board of directors and the audit committee have the authority and responsibility to select, evaluate, and where appropriate, replace the external auditor.
- A requirement that the audit committee is responsible for ensuring that the external auditors submit a formal written statement regarding relationships and services that may impair independence.
The points listed above are merely a few areas which should be covered in a company’s charter. For further guidance, contact BDO’s Risk Advisory Services group and allow our professionals to work with you to create a charter which fits your organizational culture.
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- Develop Specific Committee Duties
Once a charter has been developed, the audit committee needs to decide which specific regular assignments it will undertake and then have the approved by the board. These tasks should be communicated in writing to company management and the external and internal auditors to ensure a complete understanding of the committee’s role.
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The complexity of the company’s activities, together with the nature of the duties assumed by the audit committee, will determine its agenda. Most companies require at least four meetings a year, but this widely depends on a company’s particular circumstances.
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- Document the Committee’s Work
Regulators may require audit committees to document/report on a range of issues. These could include:
- The audit committee has reviewed and discussed the financial statements with management.
- The audit committee has discussed with the external auditor certain findings from their audit of the financial statements required by professional auditing rules.
- The audit committee has received a written report from the external auditor regarding their independence, as required by professional standards, and discussed certain issues that may be thought to bear on their independence with them.
- Based on the discussion of items one through three, the audit committee should make known whether it recommended to the board that the audited financial statements be included in the annual report.
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