Since the advent of Sarbanes-Oxley, the
role and the responsibilities of the audit
committee have become vital.
“The audit committee must act in a proactive manner to monitor and assess risk mitigation activities within the company,” says
Diane Wittenberg, CPA, partner for Audit and
Business Advisory Services at Haskell &
White LLP. “Members should ask hard questions of auditors and management and have
authority to effectively execute their charter.”
Smart Business spoke with Wittenberg
about how to build and engage an effective
audit committee.
What constitutes an effective committee
charter?
The charter defines the authority, functions
and mission of the audit committee. Weak
charters define only the minimum duties,
such as simply reviewing financial statements, whereas strong charters spell out
committee responsibilities in detail and
encourage member participation. These are
the major areas of responsibility that should
be included in the committee’s charter:
- Oversee the accounting and financial
reporting processes and the financial statement audits of the organization. - Appoint, compensate and oversee the
external auditor and ensure that his or her
skill set is matched commensurately with the
complexity level of the organization. - Establish procedures for receipt and
treatment of complaints in accounting, internal control or auditing matters, including
anonymous submissions from employees.
The charter should stop short of directing
the committee on how to carry out its duties;
members should use interpretation and judgment in executing the committee’s mission.
Which tactics lead to effective execution?
Audit committee members should ask candid, frank questions of the external auditors
about their assessment of the skills, controls
and attitudes of management and others
within the organization. Every quarter the
committee should meet with the auditors
without management present to ask questions and solicit opinions. Members should
feel confident that management is aware of
the financial reporting risks and has instituted the necessary internal controls to mitigate
the risks and then implemented monitoring
procedures to ensure effective operation of
those controls. The committee chair must
establish a culture that allows each member
to act independently so the members can ask
the critical questions to assure the proper
level of stakeholder security.
How does member composition impact committee effectiveness?
In a perfect world, the audit committee
would be composed of individuals who have
audit, accounting and industry knowledge,
but in reality, most committees have a blend
of members with different strengths.
Members who don’t have industry or product
knowledge should go through training so
they understand the risks and the financial
statements. For example, audit committee
members in a manufacturing company
should understand the metrics for that industry, such as days sales in inventory and
accounts receivable turnover, to assess if the
company’s performance is in line with its
peers. At least one member of the committee
should be an independent financial expert
who possesses the following attributes:
- Knowledge of GAAP and financial statements and the ability to use GAAP principles
in connection with estimates, accruals and
reserves - Experience in preparing, auditing, analyzing or evaluating financial statements with
a level of complexity that is comparable with
the organization - Understanding of internal control
processes and audit committee functions
What are the most effective committee and
meeting structures?
Three to four members is an ideal size so
discussions and decision-making processes
are streamlined. Note that having an odd
number of members is preferable for reaching a quorum. In public companies, the audit
committee should meet at least quarterly so
it can have the required communications
with the external auditors and maintain its
momentum and continuity. Set an annual
meeting schedule at the start of the year and
send committee members the minutes from
the prior meeting and the next agenda two to
three weeks before the next meeting. This
practice ensures that discussions remain
strategic and that the committee spends less
time on administrative tasks.
How should the committee assess its performance?
The committee should monitor its performance and assess its effectiveness at least
annually, perhaps as part of a retreat, especially as it relates to the appropriateness of its
charter in order to make recommended
changes to the board of directors. In addition,
the committee should review the performance of its individual members through self-evaluation checklists or by hiring an outside
firm to do an evaluation. In private companies or non-profit organizations, the committee usually conducts a self-assessment and
public companies often use an outside evaluator. The committee should use a continuous
improvement process to implement changes
after reviewing evaluation feedback.
DIANE WITTENBERG, CPA, is a partner for Audit and Business Advisory Services at Haskell & White LLP and audit committee chair
for the Discovery Science Center in Santa Ana. Reach her at (949) 450-6334 or [email protected].
