Behind every successful company is a group of capable leaders with a clear vision for the future. But with great power comes more responsibility, and it can be challenging to ensure the company stays on track. This is where the audit committee comes in — a crucial element of a company’s corporate governance structure.
While board management capabilities are essential, an audit committee works closely with the compliance committee to ensure the company’s financials and compliance with laws and regulations are up to par. Read on to learn more about an audit committee’s roles and responsibilities.
What is an Audit Committee?
An audit committee is a group of board members responsible for overseeing an organization’s financial reporting, risk management, and other internal controls. These board members ensure financial statements are accurate and audits are conducted independently.
Composed of independent directors with relevant expertise, the audit committee acts as a key safeguard to ensure transparency, integrity, and accountability in a company’s financial operations. A compliance committee charter outlines the roles and responsibilities of these internal auditors, ensuring they uphold governance standards and remain ethical in their practices.
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Audit Committee Responsibilities
Understanding the responsibilities of an audit committee is crucial for ensuring financial transparency and accountability in an organization. Those responsibilities include:
1. Financial Audit Reporting
Audit committees are responsible for reviewing and assessing the integrity of the company’s financial statement by scrutinizing its accounting practices and operations. They thoroughly review the financial reports prepared by management, including the balance sheet, income statement, cash flow statement, and accompanying notes.
In addition to verifying the accuracy of the financial reports, audit committees also assess their completeness. They ensure all necessary disclosures, like information about transactions, contingencies, related party transactions, and significant accounting policies, are appropriately presented.
2. Internal Control and Risk Management
Audit committees are responsible for reviewing the company’s internal control systems to ensure they effectively mitigate risks. This includes collaborating with the risk committee in accordance with the risk committee charter to evaluate and implement strategies that address operational, financial, and compliance risks.
3. Compliance and Regulatory Controls
Audit committees ensure the organization operates within the legal and ethical framework, adhering to applicable regulations and industry guidelines. The committee members review compliance programs to assess their effectiveness and identify any gaps or areas of improvement.
Audit committees also stay abreast of regulatory changes and assess their impact on the organization. They monitor developments in laws and regulations relevant to the company’s industry and operations.
4. Whistleblower and Ethics Programs
Audit committees establish mechanisms to enable employees and stakeholders to report concerns regarding accounting practices, fraud, or ethical violations. The audit committee oversees the effectiveness of these programs and ensures they provide a safe and confidential environment for reporting.
As part of their oversight, audit committees review reports of alleged misconduct or violations received through the whistleblower and ethics programs. They assess the nature and significance of these issues and determine the appropriate course of action, which may involve initiating investigations or engaging external resources, such as forensic auditors or legal counsel.
How to Form an Audit Committee
Forming an effective audit committee includes the following steps:
1. Determine Committee Composition
To form an audit committee, it is important to first define its purpose and establish criteria for member qualifications. The committee should consist of independent directors who possess relevant financial expertise, such as accounting or auditing experience. Ideally, the members should have a strong understanding of the company’s operations and industry to provide valuable insights. It’s important to ensure the committee has a diverse range of skills and perspectives to enhance its effectiveness.
2. Establish Responsibilities
Once the committee composition is defined, the next step is to establish the committee’s responsibilities. These should be clearly outlined to ensure members understand their roles in overseeing financial reporting, compliance, and risk management. Responsibilities may include reviewing financial statements, engaging with external auditors, monitoring internal controls, and ensuring the company’s adherence to regulatory requirements.
3. Develop a Charter
Next, create a charter that outlines the purpose, structure, and responsibilities of the committee. This document should cover the procedures for meetings, decision-making, and communication with stakeholders, ensuring clarity and accountability. Once drafted, the board should review and approve the charter.
Board Effectiveness Made Complete with OnBoard
Add value to your board by choosing meeting software such as OnBoard to enhance the performance of audit committees and the board of directors as a whole. Among OnBoard’s features that aid in collaboration, communication, and effective board governance are:
- Microsoft 365 Integration provides a unified platform for document collaboration, secure data sharing, and communication.
- Task Management enables clear assigning, tracking, and prioritization of action items.
- Roles and Terms Management clarifies member responsibilities and establishes clear governance protocols.
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About The Author
- Josh Palmer serves as OnBoard's Head of Content. An experienced content creator, his previous roles have spanned numerous industries including B2C and B2B home improvement, healthcare, and software-as-a-service (SaaS). An Indianapolis native and graduate of Indiana University, Palmer currently resides in Fishers, Ind.
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