Audit committee

An audit committee is a committee of an organisation's board of directors which is responsible for oversight of the financial reporting process, selection of the independent auditor, and receipt of audit results both internal and external.

In a U.S. publicly traded company, an audit committee is an operating committee of the board of directors charged with oversight of financial reporting and disclosure. Committee members are drawn from members of the company's board of directors, with a Chairperson selected from among the committee members. A qualifying (cf. paragraph "Composition" below) audit committee is required for a U.S. publicly traded company to be listed on a stock exchange. Audit committees are typically empowered to acquire the consulting resources and expertise deemed necessary to perform their responsibilities. The role of audit committees continues to evolve as a result of the passage of the Sarbanes-Oxley Act of 2002. Many audit committees also have oversight of regulatory compliance and risk management activities.

Not for profit entities may also have an audit committee.

Internationally, an audit committee assists a board of directors to fulfil its corporate governance and overseeing responsibilities in relation to an entity's financial reporting, internal control system, risk management system and internal and external audit functions. Its role is to provide advice and recommendations to the board within the scope of its terms of reference / charter. Terms of reference and requirements for an audit committee vary by country, but may be influenced by economic and political unions capable of passing legislation. The European Union directives are applied across Europe through legislation at the country level. Although specific legal requirements may vary by country in Europe, the source of legislation on corporate governance issues is often found at the European Union level and within the non-mandatory corporate governance codes that cross national boundaries.

Definitions

In India, according to Section 177(1) of the Companies Act 2013, the Board of Directors of every listed company and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.[1]

As per Rule 6 (Committees of the Board) of the Companies (Meetings of Board and its Powers) Rules, 2014, the Board of directors of every listed companies and the following classes of companies shall constitute an Audit Committee and a Nomination and Remuneration Committee of the Board:

All public companies having:

• Institute of Internal Auditors definition: "The Audit committee refers to the governance body that is charged with oversight of the organization’s audit and control functions. Although these fiduciary duties are often delegated to an audit committee of the board of directors, the (...) Practice Advisory is also intended to apply to other oversight groups with equivalent authority and responsibility, such as trustees, legislative bodies, owners of an owner-managed entity, internal control committees, or full boards of directors" (IIA Practice Advisory 2060-2 of 2004).
• In Nigeria, the Audit Committee is defined as a “Committee of Directors and the enterprises shareholders representatives whose specific responsibility is to review the annual financial statements before submission to the Board of Directors”.
• In Uzbekistan, audit committee — a committee, consisting of the members of the supervisory board of an economic entity, as a rule, including at least one independent member, responsible for establishing control over the correctness of financial reporting, selection of an independent auditing organization, overseeing audit processes, as well as obtaining and reviewing the results of internal and external audits.

Composition

Usually, membership of the committee is subject to the maximum number of 6 persons.

• In the US, a qualifying audit committee is required for listed publicly traded companies. To qualify, the committee must be composed of independent outside directors with at least one qualifying as a financial expert.
• The European Union's 8th Directive on company law 2006/43/EC states that “Each public-interest entity shall have an audit committee. The Member State shall determine whether audit committees are to be composed of non-executive members of the administrative body and/or members of the supervisory body of the audited entity and/or members appointed by the general meeting of shareholders of the audited entity. At least one member of the audit committee shall be independent and shall have competence in accounting and/or auditing.”[2]
• Institute of Internal Auditors best practice:[3] “The audit committee will consist of at least three and no more than six members of the board of directors... Each committee member will be both independent and financially literate. At least one member shall be designated as the "financial expert" as defined by applicable legislation and regulation”.

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:[4][5]

The duties of an audit committee are typically described in a committee charter, often available on the entity's website.[6]×

• 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

Impact of the Sarbanes–Oxley Act of 2002

The Sarbanes–Oxley Act of 2002 increased audit committees’ responsibilities and authority. It raised membership requirements and committee composition to include more independent directors. Companies were required to disclose whether or not a financial expert is on the committee. Further, the Securities and Exchange Commission and the stock exchanges proposed new regulations and rules to strengthen audit committees.

History

Below are a few key milestones in the evolution of audit committees:[10]

• 1939: The New York Stock Exchange (NYSE) first endorsed the audit committee concept.
• 1972: The U.S. Securities and Exchange Commission (SEC) first recommends that publicly held companies establish audit committees composed of outside (non-management) directors.
• 1978: NYSE adopts a listing requirement that audit committees be composed entirely of independent directors.
• 1988: AICPA issues SAS 61 "Communication with Audit Committees" addressing communications between the external auditor, audit committee and management of SEC reporting companies.
• 1999: NYSE, NASD, AMEX, SEC and AICPA finalize major rule changes based on Blue Ribbon Committee on Improving the Effectiveness of the Corporate Audit Committee.
• 2002: Sarbanes-Oxley Act is passed in the wake of corporate scandals and includes whistleblower and financial expert disclosure requirements for audit committees.

Survey results

Various consulting and public accounting firms perform research on audit committees, to provide benchmarking data.[10][13][14] Some results are identified below:

In a 2011 study,[15] the Council of Europe concluded that: “The Benchmarking results from a sample of 15 international organisations in Europe show that 11 have an audit committee (of which the name may vary from Audit Committee, Advisory Committee on Audits, Audit Advisory Board, Audit Progress Committee, Finance and Audit Committee, Independent Advisory Oversight Committee, Independent Audit Advisory Committee of Experts) and in seven, the Audit committee plays a role in the selection of the External Auditor".

A 2009 study[16] on 23 international organisations showed that 10 had an Audit Committee and 3 considered having one in future, with 8 reporting to the Governing Body level and 2 reporting to DG/Executive Director level.

See also

• Corporate governance
• ISA 310 Knowledge of the Business

External links

• Example of Audit Committee Terms of Reference: at the Council of Europe (1. Guiding principle, 2. Role of the committee, 3. Membership of the committee, 4. Terms of appointment, 5. Rules and procedures, 6. Access to documents, 7. Reporting, 8. Resources): wcd.coe.int/wcd/ViewDoc.jsp?id=1684131&Site=CM 12 January 2011.
• Sample Audit Committee Charter by TheIIA.org Committee Charter
• Powerpoint presentation on Audit Committee by TheIIA.org: Purpose, Process, and Professionalism.
• nacdonline.org National Association of Corporate Directors
• Association of Audit Committee Members, Inc.