An audit committee plays a critical role in safeguarding a company’s financial stability. Learn more about its roles and responsibilities.
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 helps 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 subcommittee of a company’s board members that oversees financial reporting, risk management, and compliance processes. 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.
The executive board, consisting of CEOs, COOs, and CFOs, appoints the audit committee to protect the shareholders’ and stakeholders’ interests. The executive committee and the audit committee work closely together to enhance the overall governance of the company structure, contributing to its long-term sustainability and success.
Audit committees are vital in a company as they ensure good corporate governance and maintain the trust of stakeholders. Other values the audit committee presents to a company include:
- Independent oversight: Audit committees consist of independent directors not involved in the company’s day-to-day operations. This independence helps ensure the company’s interests aren’t based on biases.
- Enhanced financial reporting: Audit committees review financial statements, assess the adequacy of accounting policies, and ensure compliance with relevant regulations and accounting standards. This oversight helps to maintain the accuracy and reliability of financial information, providing confidence to investors and other stakeholders.
- Risk management and internal controls: Audit committees monitor and evaluate the effectiveness of a company’s internal controls and risk management systems to safeguard the company’s assets and minimize the chances of fraud or mismanagement.
- Compliance and ethical standards: Audit committees ensure the organization operates within the boundaries of laws and regulations and its ethical standards. This supervision is vital for maintaining the company’s reputation, integrity, and ethical practices.
- Build relationships with external auditors: Audit committees select, appoint, and oversee external auditors’ work. They maintain direct communication with auditors, ensuring their independence, objectivity, and effectiveness. This relationship helps foster a robust auditing process and promotes open dialogue between the auditors and the committee.
With the help of a committee charter, audit committees provide an essential governance mechanism that helps instill confidence in the financial reporting process, ensures compliance, and mitigates risks.
Audit Committee Responsibilities
Audit committees have different responsibilities that contribute to effective corporate governance, including:
1. Financial Auditing Reporting
Audit committees thoroughly review the financial reports prepared by management, including the balance sheet, income statement, cash flow statement, and accompanying notes. They examine these reports to ensure they accurately represent the organization’s financial position, performance, and cash flows.
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 ensure adequate controls are in place to safeguard assets, manage risks, and prevent fraud. To fulfill this responsibility, the committees review internal control reports and risk assessments and discuss findings with management and internal auditors.
By reviewing internal control reports, audit committees assess their design and operating effectiveness to mitigate various risks. For example, they examine whether the control environment is strong, including factors such as the tone at the top, ethical values, and integrity.
3. Compliance and Regulatory Matters
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. The audit committee works closely with the corporate governance committee to resolve and investigate compliance matters.
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 Join an Audit Committee
To be a part of an audit committee, you should enhance your financial expertise through education and develop a strong understanding of financial reporting, accounting principles, and corporate governance practices.
Serve on the organization’s board to gain governance experience and build working relationships with individuals in the same field. With these skills up your sleeve, express your interest in joining audit committees. Keep an eye on board openings and actively pursue opportunities aligned with your skills and interests.
Stay updated on regulatory requirements, accounting standards, and best practices in corporate governance through continuous education and participation in relevant professional organizations.
OnBoard Powers Effective Committees
OnBoard is a powerful software solution that drives effective committees. With OnBoard, your organization can unlock a range of top-line benefits like streamlined collaboration, enhanced efficiency, and improved governance. The platform offers a user-friendly interface that simplifies board meeting management. Say goodbye to time-consuming manual processes and hello to automated workflows.
Download our free board meeting template agenda to bring structure, clarity, and efficiency to board meetings.
Frequently Asked Questions (FAQs)
What is the Purpose of an Audit Committee?
The committee's primary responsibility is to ensure the integrity and accuracy of the company's financial statements and to promote transparency and accountability in financial reporting.
Who Does an Audit Committee Report to?
The audit committee reports to the organization's board of directors by providing regular updates regarding its activities, findings, and recommendations.
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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