The audit committee of the board of directors helps the board fulfill its responsibilities to the company and its current and potential shareholders, the investment community, and other stakeholders, with respect to its oversight of the following:
- The quality and integrity of the company’s accounting and reporting practices and controls.
- The financial statements and reports of the company.
- The company’s compliance with legal and regulatory requirements.
- The independent auditor’s qualifications and independence.
- The performance of the company’s internal audit function and independent auditors.
The audit committee has a written charter, tailored to the company environment, clearly indicating committee duties and responsibilities. The committee strongly influences the overall company financial reporting and regulatory compliance environment. This influence is apparent in the committee charter. This charter is carefully reviewed and approved by the board of directors and periodically challenged and updated by the committee board.
The role of the audit committee has significantly expanded in recent years. The full board should engage in a discussion to address whether there are topics covered by the audit committee that should be assigned elsewhere. It is not unusual for the audit committee to become the default committee when oversight responsibilities are assigned by the board to its various standing committees. The board needs to ensure that the audit committee doesn’t get overloaded with responsibilities that detract from its primary function to ensure reliable financial reporting. Realizing this, the board of directors has begun to shift some of the audit committee’s responsibilities to separately chartered committees to create a balance of duties and ensure that they are effectively executed. These additional committees have often included a compensation committee, disclosure committee, and nominating and governance committee.
It is common practice for boards and their standing audit committees and individual directors to self-assess their performance periodically and formulate actionable plans to improve performance based on opportunities and areas of concern identified by the process. Sample self-assessment questions include:
- Has the audit committee taken concrete steps to exercise its mandated responsibility to oversee the independent auditor?
- Has the audit committee worked out the policies and procedures for approving non-audit services with sufficient clarity that management is able to proceed without having to exercise judgment as to whether a given non-audit service is "approved" or not?
- Is the audit committee compliant with the independence guidelines set forth by the SEC and the applicable listing requirements?
- Is the audit committee charter compliant with its expanded mandate?
- Does management involve the audit committee in a timely manner with respect to significant issues impacting the quality of earnings and reliability of financial reporting?
- Are there procedures in place for reporting significant deficiencies and material weaknesses to the audit committee in a timely manner?
- Are disagreements between management and outside auditors reported timely to the audit committee?
- Is the CFO allocating sufficient time for traditional accounting and reporting duties?
- Is there at least one technician on the CFO's staff who is an expert in generally accepted accounting principles and SEC reporting, and who is highly familiar with the company's operations?
- Has the company formed an internal audit function that is adequately resourced, sufficiently competent and objective, and properly focused on assisting with risk management and internal control evaluations?
For more information on audit committees, you can find the following tools on KnowledgeLeader and many others under the Audit Committee and Board Topic:Audit Committee Responsibilities Questionnaire