Are you joining a board’s audit committee? Consider these four audit committee requirements to safeguard financial oversight and risk.
Audit committees play a critical role in safeguarding a company’s financial stability and providing oversight of risk and compliance. To carry out these responsibilities effectively, board administrators, board members, and leadership teams must align on the core responsibilities.
Before diving into the most important audit committee requirements, let’s define the term.
What is an Audit Committee?
An audit committee serves as a sub-branch of the company’s board of directors responsible for managing financial oversight and reporting, safeguarding internal controls, minimizing organizational risk, and ultimately protecting the interests of shareholders.
The 4 Major Functions of an Audit Committee
The primary responsibilities for an audit committee include:
1. Oversight of Financial Reporting
A core function of the audit committee involves overseeing the financial reporting process. This includes reviewing audit reports, examining internal controls, ensuring accounting policies align with generally accepted accounting principles (GAAP), and ensuring legal compliance before filing the company’s annual report with the Securities and Exchange Commission (SEC).
The committee should meet regularly—at least four times a year—although it may call special meetings when necessary. It must also hold at least one quarterly conference call with management outside of regular meetings. At this meeting, members discuss audit results, including any issues or concerns related to internal controls over financial reporting. The committee issues audit reports on the existence of material weaknesses and significant deficiencies. This information is included in management’s internal controls over the financial report, which is also sent to the committee.
They should review the scope of management’s work with the company’s independent auditor, and all working papers supporting any findings or conclusions the auditors reach. The Audit committee must also approve all auditing services the independent auditor provides, including any proposed engagement letter and fee arrangements before implementation. In addition, they should monitor a company’s financial reporting processes to ensure that new accounting policies have been fully implemented and tested for effectiveness.
2. Oversight of Risk and Compliance
The committee also oversees the company’s risk and compliance functions. This includes establishing guidelines for risk management, assessing the effectiveness of the company’s risk management policies, and making sure all applicable laws and regulations are followed.
The committee members establish procedures to identify, mitigate, monitor, and report on internal control issues relating to legal compliance risks. They also establish internal policies related to regulatory compliance.
Audit committees should develop clear guidelines for their oversight efforts, including both internal controls and risk management policies. The rules should address the types of transactions that need to be reported up the chain of command and their frequency. The rules should also address how to monitor risk management.
3. Oversight of External Communications
The audit committee should monitor external communications to the public and shareholders. This includes reviewing press releases, conference calls with analysts, and all other official statements the company makes to investors. Audit committee members may work closely with management to communicate information accurately. Audit committee members are expected to follow all ethical guidelines set by the SEC when working with management. They must also disclose any possible conflicts that might prevent them from working ethically.
Audit committees work closely with management, internal auditors, regulators, and proxy advisors to make financial disclosures. They hold management accountable for ensuring accurate communications about company performance. Audit committees also provide ongoing assessments of potential risks related to public-facing communications.
4. Approval of Audit and Non-Audit Services
Audit committees must approve audit and non-audit services provided by an independent auditor. Such committees may work with management to identify audit and non-audit services that the company needs, then oversee the engagement process.
They also monitor fees charged by independent auditing firms to confirm all charges are appropriate for the specific tasks or engagements, ensure no unnecessary or duplicate charges exist, and identify costs in client contracts (e.g., services such as travel, out-of-pocket expenses). Committee members should understand these processes because they help to protect against conflicts of interest between companies and their auditors.
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The role of an audit committee requires keen oversight of the company’s financial reporting and disclosure processes, while ensuring regulatory compliance and minimizing reputational risk.
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