Audit Committee

An audit committee consists of independent NEDs who are responsible for monitoring and reviewing the company’s internal financial controls and the integrity of the financial statement.

The audit committee acts as an interface between the full board of directors and both the internal and external auditors.

Responsibilities of audit committees:

– Reviewing accounting policies and financial statements as a whole to ensure that they are appropriate and balanced.

– Review systems of internal controls and risk management within the organisation. (Note that risk management may be dealt with by a separate committee – the risk committee).

– Agreement of the work agenda for the internal audit department, as well as reviewing the results of internal audit work.

– Making recommendations to the board, for them to put to the shareholders, relating to the appointment and removal of the external auditors as well as their remuneration and terms of engagement.

– Liaising with the external auditors, in particular relating to the review and monitoring of the external auditor’s independence and objectivity as well as the effectiveness of the audit process.

The main advantage of an audit committee is that it allows auditors to report their findings to independent directors. This avoids a number of possible problems, including:

– External auditors do not have to report frauds or errors to the executive directors, who may be responsible for perpetrating them.

– Internal auditors are unlikely to feel comfortable reporting systems weaknesses to the executive directors, who will have designed the systems.