Forming an Audit Committee
Audit committees are necessary groups in organizations to ensure the integrity of financial reporting. The Sarbanes-Oxley Act of 2002 made it a requirement for all public companies to have audit committees, and many private and nonprofit organizations have implemented them as well. Having an effective audit committee can strengthen your organization and improve its financial credibility. Audit committees are essential components of corporate governance, so they should be formed the right way and with the right people in order to be the most effective.
What Is an Audit Committee?
An audit committee provides independent oversight over the financial reporting process, including both internal and external financial information. The purpose of an audit committee is to ensure the integrity and reliability of an organization’s financial information and internal control systems. The audit committee makes sure the organization’s financial statements are complete, on time, and reliable. It also makes sure the organization is properly following internal control and risk management practices. Audit committees work with both internal and external auditors to perform their duties.
Who Should Be on an Audit Committee?
An audit committee is a subset of the board of directors. Because audit committees are tasked with overseeing internal controls, risk management, and financial reporting, their members should be independent from the organization. This means that the members of the audit committee should be directors who have no material interest in the organization. At least one of the audit committee members must be a financial expert. To be considered a financial expert, the member must be knowledgeable of GAAP and financial statements, have experience in working with financial statements, and understand audit committee functions and internal control processes. The other members of the audit committee should have knowledge of the industry in which the organization operates. The number of members in an audit committee can vary, but it usually falls between three and six. The member with financial experience, such as a CPA or CFO, should serve as the chair of the committee.
Assigning Roles to an Audit Company
The organization’s needs and risks will determine the objectives and structure of the audit committee. The board of directors will define the scope and objectives of the audit committee, which will then be laid out in the audit committee charter. The decisions about the roles and responsibilities of the audit committee will differ among different organizations. For example, some organizations allow their audit committees to hire external auditors, while other organizations only allow the committees to recommend auditors while the board of directors has the final say in approving the recommendation. The responsibilities of most audit committees include overseeing financial reporting, internal controls, risk management, compliance, ethics, and internal and external auditors.
Drafting an Audit Committee Charter
In order to be effective, an audit committee must have its roles and responsibilities laid out in an audit committee charter so that its members know what is expected of them. In addition to defining the roles and responsibilities of the committee, the audit committee charter also states the requirements for membership and provides guidelines for committee meetings, such as how often they will be held. It is typically recommended that audit committees should meet at least quarterly. Additionally, the audit committee charter should define the relationship between the audit committee and both internal and external auditors. The charter should also allow for executive sessions with auditors as needed along with consultations with outside counsel as necessary.
Interacting with Internal and External Auditors
One of the main responsibilities of an audit committee is communicating with auditors. The audit committee must have ongoing contact with the internal auditors in the organization. It should review the annual internal audit plan and go over the internal auditors’ reports. When the organization decides to hire an external auditor, the audit committee will usually handle hiring, supervising, and paying the auditor. The audit committee should be in constant communication with the audit firm during the entire external audit process. The committee will make sure the external audit firm has all the materials it needs and will meet with the auditor to discuss a work plan for the audit. The audit committee will also review the findings of an audit before presenting them to the board of directors.
Dealing with Fraud
One of the key responsibilities of the audit committee is fraud prevention. Because its members are independent from the organization and have no financial stake in the company, the audit committee can deal with fraud much more objectively than someone involved in the organization. When performing a financial audit, an external auditor will look for instances of fraud. If they discover fraud, they will inform the audit committee so that it can take action. The audit committee is also tasked with monitoring internal controls and creating safe processes for employees to report fraud, abuse, or non-compliance with government regulations. The audit committee should use this information to deal with the problem while also protecting the employee.
Measuring the Audit Committee’s Success
At least once a year, the audit committee should review its performance and assess its effectiveness. Part of this review should include looking back at its charter and seeing if the committee has been acting in accordance with what was laid out in the beginning. The audit committee should also review each individual member’s performance with self-evaluations and with evaluations performed by outside firms. Nonprofit organizations and private companies’ audit committees can usually just conduct self-assessments, while public companies usually hire an outside evaluator. The audit committee should use these evaluations and assessments to continually improve its processes and implement changes where necessary.
Audit Services from a Trusted Audit Firm
When your company needs the help of an external auditor, you want to hire an audit firm that has vast knowledge and experience in the industry. Here at the Baird Audit Group, our team is made up of experienced CPAs and accountants who have decades of experience and in-depth knowledge of the auditing process. With the help of our audit services, you can improve your organization’s internal controls, quality control, and overall efficiency. We can provide you with meaningful insights to help your organization become as efficient and profitable as possible. Reach out to us at 706-855-9500 or online to get started today.