Most board directors equate the role of the audit committee with the process of conducting the corporation’s annual audit. While the audit committee takes on the responsibility for performing the audit, they are also responsible for other important tasks relative to the audit and the corporation’s internal control system.
The audit process is a fiduciary duty of board members called the Standard of Care. The Standard of Care means that board directors must place the best interests of the organization above their own interests. Audit committees primarily address issues related to the organization’s financial statements, accounting processes and internal systems of control.
Every organization has different rules for its audit committee. Boards of directors outline the duties, authority and responsibilities of their audit committees.
Defining the Audit Committee
An audit committee is appointed by the board and is composed of between three and seven board directors who aren’t part of the corporation’s management. Their basic responsibility is in helping independent auditors to oversee the corporation’s financial reporting system in a process that’s independent of management.
Audit committees provide vital oversight of the corporation’s financial reporting processes, internal controls and independent auditors. The annual audit serves as a check and balance over the company’s financial reporting practices. In addition, the audit committee is a forum for discussing financial concerns candidly and objectively.
For companies operating under the Sarbanes-Oxley Act, the Act requires corporations to appoint only independent members to the audit committee. The Act also requires companies to disclose whether they have appointed at least one financial expert to the audit committee. Best practices also provide guidance for the composition of audit committees. Boards should appoint at least one member who has recent and relevant financial experience.
Roles & Responsibilities of the Audit Committee
The audit committee is responsible for participating in the annual audit, making recommendations for hiring independent auditors, reviewing financial policies and practices, and monitoring compliance with legal and regulatory matters.
The audit committee makes recommendations for selecting independent auditors to conduct the annual audit, but the board makes the ultimate decision in hiring independent auditors.
The Audit Committee and Its Relationship to Independent Auditors
The audit committee works together to identify and recommend an independent organization to select, retain and conduct the annual audit services.
Audit committees should require auditing firms to submit a formal written statement that discloses all relationships between the independent auditors and the organization, including additional consulting work that the firm does for the corporation.
Before the audit committee can make a recommendation, they usually consult with managers and other accounting staff employees to establish the criteria by which they should select an independent auditing firm. Staff may participate in minor duties such as distributing requests for proposals, but the audit committee takes responsibility for evaluating responses and making final recommendations.
Once the audit committee makes a selection, they work together to review the annual engagement letter and set the fees for service. The agreement may include other services, such as other tax and accounting services as designated by the board.
After the committee finalizes the agreements, they may initiate discussions with independent auditors about the quality of the organization’s accounting policies and practices that outline their financial reporting processes.
Audit committees work in conjunction with independent auditors to review the scope of their auditing process, including determining the factors they will consider during the audit, including risk factors. Most independent auditors will not limit the scope or nature of their auditing procedures.
Ongoing Duties of the Audit Committee
The annual audit is the primary duty of the audit committee, but they generally meet at various times of the year to fulfill other duties as necessary or required.
Audit committees typically review the corporation’s financial policies annually and seek board approval for any recommended revisions. This responsibility includes reviewing significant accounting policies, accounting practices and financial reporting controls to make sure they are appropriate and adequate on an ongoing basis. The audit committee also accepts responsibility for reviewing policies and practices in connection with preparing monthly or quarterly financial reports and other financial statements.
The audit committee is required to discuss certain financial and accounting matters according to the Statement on Auditing Standards (SAS) as they pertain to the audit. Another of the audit committee’s duties is to review the results of the audit with independent auditors, managers and the board.
If the audit reveals any outliers, indiscretions, disputes or difficulties, the audit committee is responsible to investigate potential infractions or discrepancies and report them to the board for further review or action.
Audit Committees Follow Up With Recommendations for Management
The audit committee should allow management adequate time to review and comment on the audit committee’s findings of the annual audit. The audit committee usually responds to management with a final management letter that offers recommendations on how to comply with best practices for financial reporting and internal controls.
Financial regulations are evolving, especially during these volatile economic times. Audit committees should be continually staying current with financial trends, global risk reports, and any new or evolving legal or regulatory requirements.
Audit committees should be monitoring their corporations’ compliance with legal mandates and applicable regulatory requirements.
The Final Wrap-up on the Role of the Audit Committee
As the time nears for the annual audit, the audit committee may emit some moans and groans due to the painstaking process of conducting the annual audit and the interruption in the normal course of the workweek. On a positive note, any inconvenience of conducting the audit leads to positive benefits for the corporation.
An annual audit assures boards that their accounting practices are legal, ethical, transparent and strong, and adhere to best practices for financial principles. Companies that require fidelity in the process are usually better managers and more profitable than corporations that take a less-intense approach to the annual audit. Professional and experienced auditors can often recommend small improvements that make a big difference, which can lead the way to establishing the future success of the company.