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Advice from Outside the Square

How To Establish An Effective Audit Committee

How To Establish An Effective Audit Committee

An Audit Committee is one of the major operating committees of the Board.

An Audit Committee is in charge of overseeing financial reporting and disclosure. In some corporations, this committee is combined into a Finance, Risk, and Audit Committee and in this form also takes into its purview the areas of risk management and other financial matters including investment policies.

While an Audit Committee is generally a committee of the Board, and therefore will comprise mainly of Directors, one of its main objectives in the oversight role is to be independent of the operational functions surrounding finance, corporate reporting and risk management undertaken by the CEO and staff. Hence, depending on factors such as the size of the corporation and any inherent conflicts of interest, its membership is likely to comprise of those Directors who are not also employees (Non-Executive Directors) of the corporation and is likely to include “independent” Non-Directors.

The Audit Committee has an important role in ensuring the integrity and transparency of corporate reporting. The areas of focus that an Audit Committee must work in are: –

  • The areas of financial reporting, including the assessment of accounting policies and disclosures in the reports;
  • The area of risk management and internal controls, ensuring that they understand key risk issues including fraud, and oversight the system of internal controls;
  • The area of external audit, recommending Audit firms for appointment as Auditors and reviewing their work, setting their remuneration and considering their reports;
  • The area of internal audit – setting the scope of internal audit and responding to internal auditor’s recommendations;
  • The areas of maintaining effectiveness, communications, and compliance and ethics.

To be effective an Audit Committee needs to be set up properly and be well prepared.

This means that on setting up your Audit Committee you need to consider its roles and responsibilities, its membership, and scheduling of meetings and other key dates.

Firstly, to establish an Audit Committee you need to set out the objectives and the roles and responsibilities of the Audit Committee. This is best done by drafting a well-written Charter that sets out: –

  • The objectives;
  • The roles and responsibilities;
  • The structure;
  • The composition; and
  • The membership requirements.

A general statement of objectives should reflect the specific responsibilities of the Board that are delegated to the Audit Committee. This is followed by discussing the roles and responsibilities and spelling out how these objectives are to be met. For example, if one of the responsibilities of the Committee is to oversight risk management, compliance, and internal controls – to what extent does the Committee deal with these issues? Is it responsible for the whole risk management system, or only those that affect financial risks?

The Charter should also define the structure of the Committee in context. It should define the Committee’s authority and reporting responsibilities, who reviews the Charter and when, performance evaluation processes, and setting of meetings, keeping of minutes, and so on.

Finally, the Charter should set out how many members there are in the Committee, how they are chosen, lengths of their terms, remuneration, and other matters about composition. It is also important to define membership requirements.

After all, an Audit Committee is only as effective as its members.

Committee members should be expected to understand and assess information they are given in the areas of focus of the Audit Committee. They should be capable of directing challenging questions on key issues of impact. Each member should be capable of making a contribution but their skills and experience may address only some of the areas of focus. Hence a diverse membership is preferable as are the following personal qualities: –

  • an independent attitude of mind
  • integrity
  • ability to devote sufficient time to deliberations
  • a good understanding of the organisation and its operations
  • an ability to read and understand basic financial statements to the extent that they can ask pertinent questions about them
  • an ability to offer different perspectives.

The Charter should also deal with how new members or replacements are appointed (usually by the Board or a Nominations Committee of the Board), as well as how the Chairperson is chosen and appointed, including the standard term of appointment.

It is the Chairman’s role to ensure that meetings are properly planned and run.

Regular meetings should be scheduled, the dates set to run with other timetables pertinent to the work of the Audit Committee such as external Auditor visits. lodgement dates, dates for the AGM, and so on.

Obviously, the actual number of meetings to be held in a year will depend on the objectives of the Audit Committee, and the size and nature of the corporation. Generally, because meetings should correspond with the major stages of financial reporting and with internal and external audit cycles, a minimum of four meetings a year is standard.

Other participants may be invited to Audit Committee meetings on a needs basis, and these may include the Internal Auditors, the CFO or Accountant, Managers dealing with risk and assurance, and the CEO.

Meetings should be documented and the Minutes kept as part of the corporate secretarial records.

For most Indigenous corporations, the establishment of an independent Audit Committee can be a powerful step in ensuring the integrity of the finance, risk and reporting processes.

While it is true that the smaller Indigenous corporation may not have the resources to establish an Audit Committee, it is not true that even the smallest such corporation does “not need one.” Even a small and flexible oversight body is better than none.

For more information about why and how you need to establish an effective Audit Committee, contact us for more information. Please go to oiur website at https://otsmanagement.com.au and click on the “Contact Us” tab.

 

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