What should the audit committee’s relationship be with an organization’s board of directors, compensation committee, disclosure committee, and nominating and governance committee?
The audit committee is a separately chartered committee of the board of directors. The audit committee has a direct relationship with the board of directors, as it reports to the board on a quarterly or more frequent basis on things such as audit plans, audit findings and other items deemed to be significant. Generally, the audit committee’s purpose is to assist the board in overseeing the:
- Reliability of the entity’s financial statements and disclosures
- Effectiveness of the entity’s internal control and risk management systems
- Compliance with the entity’s code of business conduct and legal and regulatory requirements
- Independence, qualifications and performance of the external auditors
- Performance of the internal audit activity
The role of the audit committee has significantly expanded over the years. Realizing this, the board of directors has shifted 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 a governance committee.
The audit committee, compensation committee, disclosure committee, and nominating and governance committee all have interlocking goals. These goals, along with defined roles and responsibilities, should be documented within individual committee charters. Strong working relationships with these committees enable the audit committee to help each one fulfill its responsibilities to senior management, the greater board of directors, shareholders and other stakeholders. A direct channel of communication between committees is essential to this process.
What is the audit committee’s role with respect to establishing and monitoring corporate governance practices?
The audit committee plays a critical role in establishing and monitoring corporate governance practices. The board of directors has overall responsibility and accountability for risk management, internal control and corporate governance within the organization. The audit committee’s role, as a separately chartered committee of the board of directors, includes focusing on the qualitative aspects of financial reporting to shareholders; on the company’s processes to manage business and financial risk; and on compliance with significant applicable legal, ethical and regulatory requirements.
As part of the audit committee’s oversight of the internal audit process, the internal audit function is responsible for auditing the organization’s corporate governance process and communicating these results to the audit committee. In turn, the audit committee is responsible for monitoring the process put in place to implement needed improvements in corporate governance processes and controls. The execution of this system is carried out by management and the internal audit activity.
It is important to note that corporate governance and the role of the audit committee, like any other organizational structure, are significantly affected by the legal, institutional, financial, cultural and political circumstances in each country.