The primary purpose of an audit committee is to monitor an entity’s risk and to provide oversight of the entity’s financial reporting, the audit process, the system of internal controls and compliance with laws and regulations, says Maxine G. Romano, CPA, Director of Audit & Accounting at Kreischer Miller.
“While audit committees are not required for all business entities, and for many not-for-profit organizations they are not always practical, those who use one, or plan to form one, should understand the role and responsibilities that the committee must undertake to ensure its effectiveness,” Romano says.
Smart Business spoke with Romano about key characteristics of audit committee members and how audit committees allow companies to function effectively.
What characteristics are important for members of an audit committee?
Members must be independent of the entity in both fact and appearance. The Sarbanes-Oxley Act of 2002 imposed stricter independence requirements for public companies, but generally committee members should not be an officer of the entity or employed by the entity; they must act independent of management as well as independent with their personal, philanthropic and political relationships.
Members should possess the following skills:
■ Competence in accounting and finances – Best practice recommends at least one member of the committee possess financial expertise. Ideally, potential members should have past experience in finance and accounting, as well as specific industry knowledge.
■ A substantial understanding of the operations of the entity or organization – Members must be familiar with how the operations will be reflected and disclosed in the entity’s financial statements.
■ An understanding of generally accepted accounting principles, as well as professional auditing standards – Be able to identify risks associated with the entity/organization’s accounting transactions and financial statements.
■ An understanding of the Committee of Sponsoring Organization’s (COSO) internal control framework – Committee members must evaluate the entity’s internal control and the effectiveness of those controls.
■ An understanding of the role of the auditors – Committee members must be able to review the results of the audit, ask relevant questions and communicate concerns or observations. They must be transparent and be willing to make tough decisions.
■ High integrity and ethical standards – The accounting treatments of many transactions are open to interpretation and require assumptions and professional judgement. Members must act in the entity/organization’s best interest.
■ Good communication skills – Be able to have open dialogue with fellow committee members, management and external auditors.
What are some key points to consider when establishing the function of an audit committee?
■ You need a written policy/charter that describes the duties of the audit committee and includes the committee’s purpose and a description of its duties and responsibilities.
■ Assign or elect an audit committee chair, a position critical to keeping topics and meetings on point and have a process in place to educate committee members on their responsibilities.
■ Establish meeting dates well in advance to allow time to address issues or concerns prior to reporting to the board. Prioritize and understand the topics that are most important for the committee to address.
■ Develop succession plans for all committee members, but in particular the committee chair.
■ Promote open lines of communication with all company stakeholders.
■ Have a process in place to ensure that any financial/audit risks identified by management are communicated to the audit committee immediately.
Adopting and maintaining an audit committee is recognized as a best practice for most business entities and organizations. Entities with a strong audit committee benefit from the oversight, knowledge and direction it can provide. ●
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