What to Look For in an Audit Committee
Posted on March 18th, 2008 by Julie Garland McLellan »Permalink
The main requirements for an audit committee are members that understand what they are auditing and that are independent enough to give an unbiased opinion of the results of their audit.
Most global corporate governance codes call for the audit committee to be comprised of a majority (and preferably entirely) of independent non-executive directors. In particular it is considered inauspicious if the CEO, President or Chairman is an audit committee member. Some codes call for the committee to be chaired by an independent financial expert and generally define this expertise as that of a person who regularly and recently has prepared or audited company financial statements.
These requirements can be hard for government agencies and smaller companies to meet. That does not mean that the audit committees in these companies are ineffective. Most are highly effective because they are comprised of ‘good’ people. However it is worth looking closely at the mechanisms that have been put in place to remedy the lack of independence in the structure. These must bear up well under detailed scrutiny if the board is to be able to take any assurance from the committee’s operations.
The most crucial issues are independence of mind, an understanding of both the business and the financial statements and a willingness to follow investigations through to their complete conclusion.
A good audit committee member will have an abundance of curiosity about how results were generated, what reporting processes were used and where the human intervention points could alter the results. With these attributes and good monitoring tools a committee can gain very valuable insights and can customise controls to optimise expected performance.
Tags: audit committee, independence, corporate governance
