Question

“Audit Committee is said to play an essential role in a company’s corporate governance.”
Using examples critically analyse the above statement.
Total Marks: 30 marks Word limit: 1500-2000

Answer 1

Audit Committee is said to play an essential role in a company’s corporate governance.

Corporate Governance is the system by which companies are directed and governed by the management in the best interest of the stakeholders and others ensuring better management greater transparency and timely financial reporting.

Composition of Audit Committee

Audit committees should have at least one individual on the committee who is considered a financial expert. It’s not necessary for all members of the committee to be financial experts, but they should be individuals who are knowledgeable about financial issues and who have a solid understanding of accounting principles and audit and finance terms and definitions.

Powers of Audit Committee

a) To investigate any activity within its terms of reference.

b) To seek information from any employees.

c) To obtain outside legal or other advice

d) To secure attendance of outsiders with relevant expertise.

The role of the audit committee are:

a) Oversight of financial reporting and related internal controls

b) Review of filings and earnings releases Risk oversight

c) Oversight of the independent auditor

d) Ethics and compliance

e) Oversight of internal audit

f) Other interactions with management and the board

g) Audit committee external communications

The role of the audit committee forms the cornerstone for effective corporate governance. Boards rely on their audit committees to offer effective oversight of the annual auditing process. Members of the audit committee do their best quality work when the majority of the members are independent and objective. Regardless of their experience, nearly all audit committees have room to improve the financial reporting process. Effective audit committee oversight is a vital process for protecting investors and the health of the capital markets.

Audit committees also oversee the system of internal controls and ensure that the company is compliant with laws and regulations. Audit committee oversight extends to IT security and operational matters. Certified public accountants report directly to the audit committee, as opposed to reporting to management. The role of the audit committee includes such responsibilities as appointing and overseeing the work of the auditor and managing the auditor’s compensation.

Functions of Audit Committee

Audit committees review the results of the audit with senior managers and external auditors, including matters that managers generally share with the audit committee under general auditing standards. One of the primary responsibilities of the audit committee is to review significant accounting and reporting issues.For companies that have an internal audit department, the audit committee reviews and approves the audit plan, reviews staffing and provides insight over the organization of the audit plan. The audit committee also meets with internal auditors and management to touch base for periodic review. During these reviews, the audit committee may propose alternative audit approaches and coordinate the audit with internal audit staff.

Members of the audit committee should be familiar with the Sarbanes-Oxley Act of 2002 (SOX). The Securities and Exchange Commission (SEC) adopted a rule in 2003 that mandates the national securities exchanges and national securities associations to disallow listings that aren’t in compliance with the audit committee requirements of SOX.

SOX contains several rules that are specific to the role of the audit committees of publicly listed companies. The law says that all committee members must be independent to preserve the integrity of the auditing process. By virtue of ensuring that all audit committee members are independent, shareholders gain assurance that the company is doing its best to prevent inside employees from manipulating the work of the committee and the external auditors.

Audit committees are responsible to choose and oversee the issuer’s independent accountant. The board must have procedures in place to manage complaints about the issuer’s accounting practices. The audit committee’s charter gives the committee the authority to enlist the help of independent advisors and to budget accordingly for them. Audit committees also have the authority for the budget for funding the independent auditor.

In addition to SOX regulations, NYSE listing standards involve having audit committees review major issues related to accounting principles and how the company presents financial statements. The standards also require audit committees to explain significant changes in the company’s application of accounting principles, internal controls and other material control deficiencies. NYSE recommends that audit committees review these issues with management on a quarterly basis.

NASDAQ requires companies to disclose the purpose of the audit committee as it is described in its charter and the role of the committee in overseeing the financial and accounting reporting processes of the company and the audit reports of the financial statements.

Some of a board’s most crucial duties are performed by the role of the audit committee. It’s vital for the audit process to remain confidential until financial reports are thoroughly reviewed and ready for public release.