Audit Committee Purpose
The Audit Committee’s charter or purpose includes the following:
- PROCESSES – Help the Board of Directors oversee the organization’s corporate accounting and financial reporting processes. This includes internal controls, auditing financial statements and overseeing the integrity of the company’s financial reporting.
- AUDITORS – The Audit Committee also oversees the selection, fees, qualifications, independence and performance of the independent, outside auditors. The auditors must be from a registered public accounting firm. Responsibility for auditors also includes overseeing the company’s internal audit function if it has one or once it is established and operating.
- COMPLIANCE – Help the Board oversee the company’s legal and regulatory compliance. This includes reviewing any reports and disclosures required by the SEC and stock exchange (if applicable).
- REPORTS – The Audit Committee provides regular reports to the Board regarding any material issues.
Audit Committee Authority
The Audit Committee has access to all of the company’s accounting systems, including books, systems and even accounting people, such as the controller and accounting managers, for information and records.
The Audit Committee chairperson also has the authority to retain outside service providers and advisors they deem necessary, such as legal and accounting firms.
Audit Committee Ground Rules
Your success in dealing with your audit committee can be captured in two words: “No surprises.” You can pave the way to smooth interactions with some pro-active pre-planning.
You will first want to understand the audit committee’s audience, goals and rules of engagement. The Board establishes the Audit Committee to help the Board to oversee the company’s control environment.
Special emphasis is on three areas: internal controls and financial reporting; the qualification and independence of the independent external auditors; and the performance of the company’s internal audit function and of external auditors.
You will want to come to some agreement on key issues such as the definition of materiality. For example, you want to make sure there are no discrepancies in understanding of revenue recognition policies.
Audit Committee Reporting Structures
In understanding reporting structures, you’ll want to know whether or not the internal auditors have direct functional reporting to the audit committee and an indirect line to management for administrative activities.
You’ll also want to be involved with the internal audit risk assessment and audit plans, including activities and objectives regarding Section 404 compliance, if applicable.
Audit Committee Chair
The audit committee chair plays a critical role in creating effective audit committee (AC) meetings, setting priority and checklist items, ensuring the quality of premeeting materials, aligning the audit committee with other board activities, understanding risk within the business and supporting the CFO.
The AC chair also has tremendous cultural influence on the committee’s work load, style, tone and attentiveness. The best AC chairs understand the committees duties and each player’s responsibilities. She is readily available for additional insight into urgent matters and controls mission creep to ensure that she or the committee do not take on too many responsibilities, such as in the area of risk management, that interfere with their charter.
Audit Committee Chair and CFO Relationship
For both the Audit Committee chair and the CFO, a strong, healthy relationship is critical. This may require informal time spend together to build rapport and to fully understand long-term financial performance goals and between-meeting developments. From the CFO’s standpoint, this is a most important relationship and you will want a “meeting before the meeting” with your Audit Committee Chair.
Another best practices is to schedule regular meetings in the middle of field work and prior to the year-end audit committee meeting
You’ll want to make sure your schedules are done – ideally before the auditing firm is developing their audit plan.
Identify Potential Issues
Also, start your own forward-looking identification of potential issues such as new accounting and reporting requirements.
Provide input to management’s goal setting, and provide you own clear objectives and expectations for each meeting.
Collaborate to develop and agenda for year-end audit committee meeting. You’ll both want to the meeting to run smoothly to reflect well on you both. Start by establishing and agreeing to all agenda items for discussion
What would most improve your committee’s overall effectiveness?
Better understanding of biz and risks: 39% Additional expertise (e.g. cybersecurity): 31% Willingness to challenge management: 27% Diversity of thinking, background: 24% Deeper financial reporting & audit expertise: 19%