The main responsibility of the audit committee is to oversee the corporation’s financial reporting. Many additional duties and responsibilities fall under the umbrella of the audit committee. The financial crisis of 2008 created many new questions about what changes audit committees could make to assure investors that the information they’re getting is accurate, honest and comprehensive so they can make informed decisions. Well-running audit committees can protect against internal and external fraud. The protections that audit committees provide are an essential component of the healthy functioning of the capital markets.
Purposes of the Audit Committee
In better understanding the responsibility of the audit committee during proxy season, it helps to keep in mind the reasons that audit committees are a necessary part of the corporate plan.
The main purpose of audit committees is oversight. Audit committees provide the second set of eyes that evaluate the big financial picture of the corporation and call out any potential problems or discrepancies. Audit committee members work together to oversee the audit process and the company’s system of internal controls. During proxy time, audit committees oversee the financial reporting process and ensure that the company remains in compliance with laws and regulations.
Duties and Responsibilities of the Audit Committee
The umbrella of audit committee duties encompasses many review processes. Audit committee members accept the task of reviewing significant accounting and reporting issues. Committee members must know and understand the most recent professional and regulatory pronouncements, assess how they will impact the company’s financial statements, and be able to apply them to the company’s reporting process.
Audit committees also review the company’s internal controls over financial reporting, security of information technology and financial matters involving operations.
During proxy time, audit committees take on the responsibility for the appointment, compensation and work of external auditors. Once the audit has been completed, the audit committee reviews the results of the audit with management and the external auditors and makes sure all parties agree that the audit complies with all accounting standards.
Relationships With Internal and External Auditors
One of the common internal controls is for corporate CPAs to report to the audit committee rather than to management.
The audit committee coordinates the internal audit process. This entails reviewing various approaches to the audit and reviewing and approving the audit plan. The committee organizes the audit and ensures that the audit is properly and appropriately staffed.
The audit committee chair may opt to meet with internal auditors and managers periodically during the external audit to discuss issues of potential concern. Committee members may meet with external auditors privately and communicate issues to the board and management team.
It’s also the audit committee’s responsibility to investigate any potential infractions or discrepancies that may arise during the audit and share this information with the board.
Regulatory Matters and the Audit Committee
Audit committee members must know the current regulations and follow them explicitly. Audit committee members sometimes also offer their ideas and opinions for improving the audit process.
As of April 2013, the Securities and Exchange Commission (SEC) issued a regulation for national securities exchanges and national securities associations mandating them not to list any security of an issuer that failed to comply with the audit committee requirements of the Sarbanes-Oxley Act of 2002. Specifically, the regulation requires the following things related to the audit process:
- Audit committee members must be independent.
- The audit committee must select and oversee the issuer’s independent accountant.
- The audit committee must identify procedures for handling complaints about the issuer’s accounting practices.
- Allows the audit committee to engage advisors.
- Provides for the audit committee to have a budget to enlist the help of outside advisors.
In an effort to improve the auditing process, the SEC has been asking for public comments on disclosure requirements for audit committees, especially in regard to overseeing independent auditors. The SEC is also particularly interested in the relationship between the audit committee and the external auditors and how their relationship may be able to enhance the disclosures they provide to investors on the activities and responsibilities of the audit committee. The SEC has expressed interest in refining accounting protocols to provide greater insight into the auditing process.
The SEC seeks clarification on the factors that audit committees use to oversee independent auditors and how they make decisions about appointing and retaining quality auditors.
Independence Is Important to the Auditing Process
It’s important for boards to ensure that all audit committee members are independent to prevent managers and other insiders from unduly influencing their work.
Niche corporations are often smaller, making it more challenging to uphold the same audit standards as those of mainstream corporations. Niche market corporations need to meet the same audit committee disclosure requirements as other companies, as they face the same conflicts and risks as traditional corporations. Smaller corporations that lack the means for going above and beyond disclosure requirements should disclose any deficiencies related to the audit committee to their investors.
In addition to having independent auditors, it’s preferred for boards to choose auditors with forensic audit backgrounds to assist with identifying intentional accounting errors or irregularities and to train other audit committee staff, with the goal of deterring fraud.
Board management software systems, such as Governance Cloud, by Diligent, provide a platform for secure messaging and storing documents for audit committees. Governance Cloud offers unlimited cloud-based storage, templates for compliance documents and virtual data rooms to increase communication and collaboration in a secure environment.
Some Final Words on Audit Committees During Proxy Season
While audit committees are busiest during proxy season, they often meet at other times during the course of the fiscal year. All year long, audit committees review financial policies, accounting policies and accounting practices to make recommendations for improvements to the board of directors.
Boards are required to appoint at least one financial expert to their audit committees. When appointing board members, the nomination committee should look for board directors who can understand financial reports and be willing to ask exploratory questions about them, in addition to other talents, expertise and diversity they may bring to the board.
In essence, the highest and most independent auditing processes will instill the necessary trust in the board by the investors.
