The combined code requires that all listed
companies set up an audit committee.
Ideally:
·
It should
comprise at least three non-executive directors which are independent of
management;
It should
comprise at least three non-executive directors which are independent of
management;
·
The
members should have a wide range of business and professional skills;
The
members should have a wide range of business and professional skills;
·
The
members should have a good understanding of the business yet should have had no
recent involvement with direct management of the business;
The
members should have a good understanding of the business yet should have had no
recent involvement with direct management of the business;
·
The
committee should have clear written terms of reference setting out its
authority and its duties.
The
committee should have clear written terms of reference setting out its
authority and its duties.
Clearly this can sometimes be difficult to achieve.
However, the object is to create a committee which is competence to carry out
its role, is independent and is free from bias.
However, the object is to create a committee which is competence to carry out
its role, is independent and is free from bias.
The key objectives associated with the setting up
of audit committees, from the point of view of corporate governance generally,
is:
of audit committees, from the point of view of corporate governance generally,
is:
·
To
increase public confidence in the credibility and objectivity of published
financial information.
To
increase public confidence in the credibility and objectivity of published
financial information.
·
To assist
the directors in carrying out their responsibilities for financial reporting.
To assist
the directors in carrying out their responsibilities for financial reporting.
·
To
strengthen the position of the external auditors by providing a channel of
communication at board level without the constraint of any executive bias.
To
strengthen the position of the external auditors by providing a channel of
communication at board level without the constraint of any executive bias.
Three are advantages to having an audit committee. These
are:
are:
·
It can
improve the quality of management accounting as they are able to criticize
internal reporting, which is not necessarily the responsibility of the external
auditors.
It can
improve the quality of management accounting as they are able to criticize
internal reporting, which is not necessarily the responsibility of the external
auditors.
·
It can
facilitate communication between the directors, internal and external auditors
and management.
It can
facilitate communication between the directors, internal and external auditors
and management.
·
It can help
minimize any conflicts between management and the auditors.
It can help
minimize any conflicts between management and the auditors.
·
It can
facilitate the independence of the internal audit role if the internal auditors
report to the audit committee directly.
It can
facilitate the independence of the internal audit role if the internal auditors
report to the audit committee directly.
However, there are some disadvantages which the
members of the audit committee have to avoid;
members of the audit committee have to avoid;
·
It can be
seen that their purpose is to criticize or ‘catch out’ executive management.
It can be
seen that their purpose is to criticize or ‘catch out’ executive management.
·
It can
result in the perception, if not the reality, of a two-tier board.
It can
result in the perception, if not the reality, of a two-tier board.
·
The
non-executive can become too embroiled in detail and act like executive directors
thus losing their independence.
The
non-executive can become too embroiled in detail and act like executive directors
thus losing their independence.
In detail, the role of the audit committee can be
summarized as :
summarized as :
·
To review
internal control procedures and processes;
To review
internal control procedures and processes;
·
To review
the internal audit function and act as a channel of communication to executive management;
To review
the internal audit function and act as a channel of communication to executive management;
·
To review
current accounting policies and the impact of any possible changes;
To review
current accounting policies and the impact of any possible changes;
·
Review
the usefulness and effectiveness of current management information;
Review
the usefulness and effectiveness of current management information;
·
Review
the financial information presented to shareholders and other information
issued by the company such as profit forecasts etc.;
Review
the financial information presented to shareholders and other information
issued by the company such as profit forecasts etc.;
·
To liaise
with external auditors and to consider their repots to management and any
issues arising from the audit and ensure any audit recommendations are dealt
with by executive management;
To liaise
with external auditors and to consider their repots to management and any
issues arising from the audit and ensure any audit recommendations are dealt
with by executive management;
·
To review
the effectiveness and efficiency of the eeternal audit;
To review
the effectiveness and efficiency of the eeternal audit;
·
To
consider the independence of the auditors from executive management. This can
be particularly important where the audit firm is supplying substantial
additional services to the client in addition to their role as external
auditors;
To
consider the independence of the auditors from executive management. This can
be particularly important where the audit firm is supplying substantial
additional services to the client in addition to their role as external
auditors;
·
To
recommend the nomination of external auditors and also to deal with their
remuneration for carrying out the audit work;
To
recommend the nomination of external auditors and also to deal with their
remuneration for carrying out the audit work;
·
Review
compliance with the combined code on corporate governance.
Review
compliance with the combined code on corporate governance.
In essence, the audit committee is designed to act
as an independent voice on the board of directors with regard to audit and
corporate governance issues and be a valuable asset, particularly with respect
to maintaining the independence and integrity of the internal audit function.
Students need to be familiar with the composition and role of audit committees
as it is a popular topic for examiners.
as an independent voice on the board of directors with regard to audit and
corporate governance issues and be a valuable asset, particularly with respect
to maintaining the independence and integrity of the internal audit function.
Students need to be familiar with the composition and role of audit committees
as it is a popular topic for examiners.