Question

How should Pat proceed with the audit committee chair? What obligations does Pat have, if any, to the audit committee chair? As the CAE, what are Pat’s role and responsibilities with respect to the audit committee and the audit committee chair?

Answer 1

Please mentioned below the answer

“An audit committee is essentially an oversight committee, for it is management who are responsible for the internal controls and the financial statements. The committee, however, has to satisfy itself, on behalf of the board and ultimately the shareholders that key controls are operating, that ethical practices are being reinforced, that key accounting estimates and judgements are being properly made and that internal and external audits are effective.”

The effectiveness of the audit committee hinges on the chair’s effectiveness, which in its turn relies heavily on the chair’s personal attributes. Strong personal skills are crucial to being able to build and maintain an effective working environment. A key requirement of the ability of the audit committee to exercise constructive top down pressure that supports professionalism throughout the organisation lies with the chair’s authority in handling the audit committee’s agenda and how it communicates to management and the board. The chair should be recognised for his or her leadership and vision, and be perceived by other committee members and management as able to set and manage the audit committee’s agenda. The chair should be acknowledged as having the personal courage to raise and deal with tough issues and to support other members to do the same. Formal meetings of the audit committee are at the heart of the chair’s work. However, the chair’s points of contact within the organisation should go far beyond the board room. The audit committee chair, as well as the other audit committee members, need to keep in touch with key audit committee stakeholders, such as the board chair, the CEO and CFO, internal and external auditors. In many organisations, the audit committee chair meets regularly with each of these individuals as part of the process of developing the meeting agenda and preparing for each meeting. The audit committee chair is responsible for fostering these relationships to ensure that the audit committee can perform its role effectively. The audit committee chair also has an important role to play in ensuring that that the mix of committee members – their background, experience and skills – are right commensurate on the complexity and the risk profile of the organisation. The audit committee chair should oversee the professional development of the members, and also ensure that they have the right information to perform their roles. The chair is not responsible for doing all the work: he or she should identify who on the committee is best placed to perform different roles and then recognise their contribution.

Some characterics of an effective audit committee chair

1. An independent and proactive leader with confidence and integrity

2. A highly respected and experienced board member, who possesses strong financial literacy skills

3. A person with an excellent working knowledge of audit committee practices and risk management frameworks

4. A good listener and communicator who can facilitate successfully

5. A champion of open and frank discussion with discipline

6. A tenacious person that is prepared to ask the tough questions

7. A person who has the time available to develop and closely monitor the committee agenda

The Sarbanes-Oxley Act of 2002 (SOX) transferred powers from the management of a public company to its independent audit committee. The chair of the audit committee has the important role of providing leadership for the audit committee and of exercising powers on behalf of the committee previously reserved to management. Today, successful audit committee chairs are taking a broader view of their responsibilities beyond the technical legal requirements of SOX or SEC or exchange listing rules and are attempting to follow what are developing as best practices. Some of the best practices being implemented today include the following:

1. Audit Committee Composition: The successful chair should be concerned about the quality and competencies of the audit committee members. We all know about the requirement for a financial expert imposed by exchange listing rules and SEC disclosure requirements. However, it is not necessary, or even desirable, to require that every member of the committee be an accounting expert. Persons with knowledge of the industry and familiarity with company operations can be valuable members even if they are not financial experts, assuming that they have basic accounting knowledge. Moreover, successful audit committee chair are evaluating the contributions of their committee members at least annually and recommending necessary changes where appropriate.

2. 2. Internal Audit: It is a best practice for the head of the internal audit function to be hired by the audit committee, report directly to the audit committee, and be subject to dismissal by the audit committee. This best practice has, on occasion, created conflicts with management who, under this arrangement, may view the internal auditor as not part of the management team. A successful audit committee chair must anticipate these potential conflicts, devise methods to insure that there is a good rapport between and among the internal auditor, the CFO, and the chief accounting officer, and make certain that all parties understand their respective roles. The audit committee chair should also inquire periodically from the internal auditor as to the adequacy of staffing of the internal audit function. The chair and the internal auditor should exchange cell phone numbers and email addresses.

3. Coordination with Independent Auditor: The chair should have a good working relationship with the partner and manager of the independent auditor so that any problems can be anticipated and any friction with management or the internal auditor quickly resolved. The chair should schedule private meetings with the independent auditors and annually have a robust discussion of any independence issues.

4. Educating the CFO: Many CFOs are uncertain as to what the audit committee expects from them. The successful chair, after consulting with the full committee, must have an open and candid dialogue with the CFO, preferably privately on a one-on-one basis, which would include at least the following topics: (a) the specific types of information the audit committee requires to perform its function, with the understanding that this information needs constant refinement (and too much information is as bad as too little information); (b) what public documents, such as press releases and periodic SEC filings, does the audit committee wish to review prior to publication or SEC filing, and the time frames in which such information is to be supplied to the audit committee; (c) the expectations of the committee for the CFO to immediately communicate material financial developments within the company; and (d) what monitoring of the services of the independent auditor and the costs of such services should be provided by the CFO.

5. Audit Committee Procedure: The successful chair will attempt to develop a consensus among the audit committee members on all important issues and will suggest the need, when appropriate, for special consultants, including independent counsel. The chair will obtain recommendations from the audit committee members as to the number and length of meetings and, with the assistance of the internal auditor, develop an agenda for each meeting. The chair should schedule an annual meeting with the head of both the sales and tax departments and an annual self-evaluation of the audit committee, including a review of the audit committee charter. Finally, the successful chair should insist upon the continuing education of all new and old audit committee members on internal accounting issues and on new accounting pronouncements.

Responsibilities :

Boards of Directors and their committees rely on management to run the daily operations of the business. The Board's role is better described as oversight or monitoring, rather than execution. Responsibilities of the audit committee typically include:

· Overseeing the financial reporting and disclosure process.

· Monitoring choice of accounting policies and principles.

· Overseeing hiring, performance and independence of the external auditors.

· Oversight of regulatory compliance, ethics, and whistleblower hotlines.

· Monitoring the internal control process.

· Overseeing the performance of the internal audit function.

· Discussing risk management policies and practices with management.

“ An audit committee is essentially an oversight committee, for it is management who are responsible for the internal controls and the financial statements. The committee, however, has to satisfy itself, on behalf of the Board and ultimately the shareholders, that key controls are operating, that ethical practices are being reinforced, that key accounting estimates and judgements are being properly made and that internal and external audits are effective.”

The duty of the Audit Committee is to assist the Board of Directors and to improve the efficiency of Board work by preparing matters falling within the competence of the Board of Directors. The Board of Directors remains responsible for the duties it assigns to the Audit Committee. The Committee has no autonomous decision-making power, and the decisions within its competence are taken collectively by the Board. The Committee reports to the Board on the matters addressed and measures taken at least four times a year. The Committee makes proposals to the Board for decision-making as appropriate.

The main duties of the Audit Committee are:

• To monitor the statutory auditing and reporting process of the financial statements and consolidated financial statements as well as overseeing their accuracy and scope;

• To review the report of the Company's financial and tax position quarterly prior to approval by the Company's Board of Directors;

• To supervise the financial reporting process;

• To monitor the efficiency of Stockmann´s internal control, internal audit and risk management systems and to monitor the Group's risks as well as the quality and scope of risk management;

• To approve the internal audit guidelines and review the internal audit plans and reports;

• To review the description of the main features of the internal control and risk management systems in relation to the financial reporting process, which is included in the company's Corporate Governance Statement, and the related policies and principles;

• To evaluate the independence and work of the statutory auditor and propose a resolution on the election of the auditor and his fee;

• To approve, in accordance with the principles approved by the Board of Directors, or authorise the CFO in advance to approve all non-audit services provided by the auditor, which are not forbidden services, including the area covered by them and the estimated fees payable;

• To evaluate compliance with laws, regulations and company policies and monitor significant litigations of Group companies;

• To monitor the transactions of the Company's management and their related parties and any related conflicts of interest; and

• To execute any other duties bestowed upon it by the Board.