Composed of individuals who serve on an organization’s board, an audit committee is responsible for ensuring an organization operates in an ethical environment and complies with laws and regulations. Charged with oversight of financial reporting, risk management and internal controls, audit committees also are responsible for selecting the public accounting firms that serve as their organizations’ external auditors as well as for maintaining relationships with their organization’s own internal audit team.
The essential nature of audit committee responsibilities was reinforced in 2002 with the passage of the Sarbanes-Oxley Act, which significantly strengthened the role of audit committees in organizational governance. Individuals who pursue an online Master of Accountancy degree can acquire knowledge and skills that could be beneficial when they interact with and report to audit committees.
Audit Committee Role and Duties
The breadth of an audit committee’s role and duties is demonstrated by its responsibilities. Some of the most significant responsibilities under the purview of an audit committee include the following:
- Ensuring the organization’s financial statements are understandable and reliable.
- Ensuring the organization establishes a thorough risk management process and effective internal controls.
- Reviewing the organization’s policies, particularly in areas such as ethics, conflict of interest and fraud.
- Reviewing the organization’s litigation and regulatory proceedings.
- Selecting and implementing a direct reporting relationship with the public accounting firm that serves as the organization’s external auditor.
- Establishing communication with the organization’s internal auditor and reviewing all audit findings.
Audit committees also play a significant role in setting the tone of an organization. They do so by ensuring their organizations develop and implement a code of conduct and establish effective communication channels. Audit committee members also need to be aware of what management is doing to achieve compliance with laws and regulations, and they must be knowledgeable about issues such as ongoing investigations and disciplinary actions.
With such a broad scope of responsibilities, these committees can face significant challenges. In its 2019 survey of 1,300 audit committee members worldwide, KPMG identified two of the greatest challenges to audit committees performing their core oversight responsibilities:
- Maintaining internal control over financial reporting, disclosure controls and procedures.
- Helping ensure their organization has the talent and resources to maintain quality financial reporting.
KPMG also reported that audit committee members viewed technological innovation, digital disruption and the complexity of business as the factors that place the most pressure on risk management and internal controls.
How an Audit Committee Operates
The charter an audit committee establishes sets the foundation for its operations. The elements of the charter lay the groundwork for carrying out all audit committee responsibilities. For example, an audit committee’s charter may be drafted to accomplish the following key tasks.
- Set forth the audit committee’s purpose and list its specific responsibilities in detail.
- Establish the audit committee’s authority to carry out specific responsibilities, such as appointing and compensating an external auditor, obtaining information and meeting with officers of the organization.
- Define the composition of the audit committee, how members will be appointed and any requirements for expertise among the members.
- Describe how the audit committee will conduct meetings, how often it will meet, who must attend meetings and the circumstances under which the audit committee will meet in executive session.
The precise composition of an audit committee depends on the type of organization the committee serves. For example, publicly traded companies in the United States must comply with the rules of the U.S. Securities and Exchange Commission (SEC) in areas such as audit committee composition, independence and member qualifications. The audit committees of governmental entities must comply with requirements established in state statutes, city or county charters, municipal codes or local laws.
The expertise of members and the ongoing training they receive have a significant effect on an audit committee’s ability to carry out its responsibilities. Audit committees must continuously update their knowledge in areas such as new accounting methods, technology and financial disclosures.
What Makes Audit Committees Effective
How effective the committee is in executing its audit committee responsibilities can be influenced by several factors:
- Having a strong audit committee chairperson who can facilitate productive meetings and communicate effectively is essential to the success of an audit committee.
- Providing training to audit committee members through adjunct meetings, retreats or courses offered by governance organizations helps committee members carry out their responsibilities.
- Performing a self-assessment helps an audit committee identify and address opportunities for improving its oversight activities.
- Ensuring transparency in its activities allows an audit committee to share important information with stakeholders.
- Establishing effective communication — both internally among audit committee members and externally with management, auditors and non-audit board members — helps an audit committee demonstrate how it is carrying out its responsibilities.
- Ensuring diversity among committee members in terms of experience and knowledge enhances its capabilities and proficiency.
Among the most important characteristics of an effective audit committee is strong communication with and oversight of auditors. Audit committees need to have a good working relationship and direct line of communication with the public accounting firm that serves as the organization’s external auditor. They also must establish a strong rapport with internal auditors to promote effective internal controls.