The future role and function of the audit committee is under the spotlight.
Many of the prominent failures of corporate governance in the last couple of decades have involved breakdowns and deficiencies in communication, internal control processes and financial reporting. The perception is that board of directors and audit committees failed to prevent these failures and the external auditor failed to discover them.
The upswing of government and oversight intervention, the stakeholder wish for transparency and corporate accountability demands an adequate response from boards to provide the guidance, management to provide the disclosures and auditors to ensure accuracy.
The Copenhagen Compliance Conference on Audit Committees will explore the second wave workings of the audit committee (AC) and provide guidance to audit committee chairmen and members on the future of the AC charter and the challenges they face.
The AC have grown to become one of the main pillars of the corporate governance system, however many AC have too much on their plate. Questions were designed to evoke discussions around how these leading practitioners ensure their committees are effective. It is believed that these reflections will be of wider interest, particularly to other audit committee members, while recognising that there is no 'one-size-fits-all' best practice.
The existence of an independent audit committee is recognised internationally as an important feature of effective corporate governance. A clear sentiment resonates among audit committee chairmen interviewed: there is a robust acceptance of, and obligation to, conduct the job of providing assistance to the board to fulfill its oversight responsibilities.
The audit committee runs a balancing act: effectively dealing with its additional oversight functions while, at the same time, maintaining the collegiality and relationships that are expected of board directors.
To do this, the audit committee must give thought to the relationships it has with the board (in particular, the chairman of the company), management, other sub-committees and the internal and external auditors. The audit committee is in a key position to encourage open and frank communication.
The approach to the role of audit committee chairmen and some of the challenges facing audit committees today are discussed in this paper. Many of the regulations and governance structures imposed on audit committees across the different jurisdictions differ in the detail, and the exact remit of the committee also varies, but all share the common objective of ensuring effective, independent oversight of financial reporting.
Four clear messages were heard consistently:
- Audit committees owe their primary responsibility to the board and work best when they are an integrated part of the board process
- Open debate and mature questioning are fundamental to their effectiveness
- Audit committee members need sound commercial and financial knowledge but not necessarily deep accounting knowledge
- Audit committees need high quality and reliable information to fulfil their role and have an important responsibility in the selection of those responsible for delivering that information.
Interviewees said that the long-term effectiveness of the audit committee will in part depend on its ability to renew itself. Infusing fresh talent with new ideas will offer different perspectives. Diverse backgrounds and varied experience enhance the efficacy of committees, especially when advising newly-listed companies.
Diversity of skills and experience among committee members is seen as an essential characteristic of an effective audit committee. Financial expertise and literacy are important for most interviewees, but so is the ability of audit committee members to understand a company's business and risk profile.
While regulation is clearly relevant to the effectiveness of audit committees, it is not considered the determining factor. Rather, the key to a truly effective audit committee is the behaviour and culture emanating from the board throughout the organisation's management, committees and assurance activities. This is something that cannot be regulated for.
The volatility of capital markets combined with the thirst for transparency and investor information is increasing at a steady rate. The audit committee can play a key role in meeting these demands. At the same time, a number of interviewees warned of the danger of unrealistic expectations around what committees can achieve.
This warning was also directed to companies and, looking forward, there needs to be caution as to how far the role of the audit committee extends. In handing new responsibilities to the audit committee, there is a risk of it becoming so burdened that it is unable to carry out its core functions effectively.
Source: Accountingnet.The Institute of Chartered Accountants in Australia
The Institute of Chartered Accountants of Scotland
