Friday, July 12, 2024

Corporate governance and reporting – Part 6

THE AUDIT COMMITTEE

Introduction

Of all the Board Sub-Committees, the Audit Committee is arguably the most important. Its functions cover almost half of the Board functions. Therefore, its composition and effective functioning can make or break the whole Board. In this instalment, I look at the various aspects from leading corporate governance codes. 

Composition of Audit Committee

The committee should be made up of suitably qualified and experienced members. Ideally, the committee should have at least a professional  Accountant as a member and should, overall, have competences in the sector in which the entity operates.

At least 3 members of the Audit Committee should be from the Board who should be non-executive and independent directors.  The minimum number of the members of the Audit Committee is three (3). 

The Chairperson of the Audit Committee should elected by the Board and  be a non-executive and independent director. Of note is that the Chairperson of the Board should NOT be the Chairman or member of the Audit Committee. 

The Committee should be permitted to consult with specialists or consultants subject to Board approval of the process.

The Audit Committee Charter, Terms of Reference and minimum meetings

The Board should approve an Audit Committee Charter which will be used by the Committee to carry out its functions. The Charter sets out the areas of responsibility together with the boundaries. 

 The Committee should meet a minimum of twice per annum. It can meet more often as necessary. It should also meet at least once a year with internal and external auditors WITHOUT management being present to discuss issues which cannot be discussed in a public forum and to improve the independence of the external and internal auditors.

The role of the Audit Committee

The Audit Committee has several functions which include the following:

  • Monitoring the integrity of financial statements and other public pronouncements relating to financial performance;
  • Providing advice to the Board on the integrity and fairness of the  annual report and financial statements;
  • Reviewing the company’s internal financial controls and internal control and risk management systems. In some cases, risk management is delegated to a separate Risk Committee or the Board itself;
  • Monitoring and reviewing the effectiveness of the company’s internal audit function including approving the annual internal audit plan. This is important to improve the independence of the internal audit function;
  • Making recommendations on the appointment of the External Auditor and also monitoring the independence of the External Auditor;
  • Monitoring and reviewing the performance of the finance function of the entity. An annual assessment of the function should be done by the Committee to ensure that the finance function is appropriately resourced by people with the right skills and experience; and
  • Appointment, performance assessment and /or dismissal of the Chief Audit Executive (Internal Audit Executive). This is done to improve the independence of the internal audit function which should report administratively to Senior Management and functionally to the Audit Committee.

Signs of an ineffective Audit Committee

Having discussed the role of the Audit committee, it is Important to highlight some of the signs of an ineffective Audit Committee.

  • Delayed financial reporting and finalizing audits;
  • Ineffective risk management process-for example, no risk registers, no responses to significant risks facing the entity (If the risk management is under the Audit Committee;
  • No performance appraisal of the internal audit and finance functions;
  • Absence of An Audit Committee Charter;
  • Ineffective management of the External Auditors-this normally manifests itself through delayed financial reporting and should be linked to the appraisal of the finance function and ;
  • Few or no meetings during a financial year.

Conclusion

The role of the Audit Committee covers a significant part of the corporate governance function. Therefore, its composition and effective functioning should be ensured by the main Board. The Committee should also be subjected to an annual performance review by the Chairperson of the Board.

Innocent Munjanja is  Technical Director at Botswana Accountancy Oversight Authority 

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