The Role of Audit Committees in Financial Governance
Audit committees require members with different experiences, perspectives and expertise for optimal operation. Furthermore, an experienced chairperson who fosters collaboration among its members is essential.
As mandates expand beyond financial reporting oversight, diversity of skill sets becomes even more essential. To facilitate this goal, an efficient process for onboarding new members must be in place.
1. Identify Risks
Audit committees serve as subcommittees of boards to oversee internal financial information and external reporting, acting in tandem with other governance teams to do so. To do this effectively requires independence, strong skepticism, and the willingness to challenge management when necessary. They must also stay up-to-date with professional and regulatory changes so they can identify emerging risks; tools like our twice yearly regulatory roundup can assist them in keeping tabs on global developments as well as pinpoint areas of risk.
Effective audit committees need to understand the processes that ensure financial reporting and internal controls at their company are independent and accurate. That is why it’s vital for any committee to have members with various backgrounds and expertise – not only finance directors, but non-finance ones as well – such as non-finance directors who bring business knowledge or risk experience as well as non-finance directors. Many directors we speak to say serving on an audit committee can be rewarding; however, to maximize its effectiveness they require proper support and tools in place in order to maximise its potential effectiveness.
2. Communicate with Management
The audit committee should have the ability to effectively communicate with both management and external auditors, including external auditors. In addition, it should help establish processes that ensure complaints about accounting practices are investigated and resolved expeditiously.
An effective committee requires an independent and skeptical mindset with an appetite to challenge management. Composed of directors from diverse backgrounds and expertise levels, its ideal members should work in cooperation with one another as well as management to find solutions and foster a productive working environment.
Audit committee chairs often travel globally to meet with local management and regulators in different markets to gain valuable insights and understand how the company operates in each one. Many committees also find allowing new board members to attend as observers is useful to get fresh perspectives on core issues and risks. Digital governance software allows members to easily manage agendas and share documents while tracking signoff status remotely – this also includes members being able to affix electronic signatures for documents they approve electronically from anywhere.
3. Monitor Financial Reporting
One of the key functions of audit committees is monitoring financial reporting and internal controls. This involves verifying that management’s financial statements are complete, accurate and transparent as well as checking if accounting policies designed and operating effectively as well as any voluntary changes which involve judgements or deviations from GAAP norms or industry norms and evaluating whether these statements adequately represent company principal risks.
Audit committee work requires an in-depth knowledge of their company’s financial operations, so many companies require their members to be independent for optimal results. This provides objectivity necessary to identify any potential problems early on and discuss them openly with management about any possible adverse consequences.
Long committee tenure can also breed complacency and an appearance of lack of independence from management, so many boards implement a policy of rotating audit committee membership every five to seven years – although special situations may require adjustments.
4. Monitor Compliance
As part of their role in financial governance, audit committees must ensure compliance with regulations regarding internal controls and financial reporting. To do this effectively, committee members must remain apprised of regulatory changes as they emerge and assess how this affects their organization.
Additionally, the committee should remain mindful of bribery and corruption risks. They must understand any incentives that might encourage wrongdoing among management or employees and assess whether their whistleblowing policies provide for an appropriate mechanism.
As part of their responsibility to promote a robust culture, audit committees should encourage open dialogue and candid discussions among all stakeholders. Finally, each year the committee should complete a thorough self-assessment to satisfy stock exchange regulations while also helping identify areas for improvement and drive actionable change. To streamline this process more efficiently use digital governance tools that enable members to sign their e-signatures quickly before and after meetings.