An audit committee stands as a cornerstone within a company’s board of directors, entrusted with spearheading financial reporting and disclosure oversight. This committee significantly ensures that all financial activities align with high standards of accuracy and integrity.
All publicly-traded companies in the U.S. are mandated to uphold a qualified audit committee to be listed on a stock exchange. Committee members must constitute independent outside directors, including at least one individual who possesses expertise in finance.
Key Highlights
- The audit committee, comprised of members from the board of directors, oversees financial statements and reporting integrity.
- Regulatory compliance dictates that the audit committee should include outside board members, as well as experts in finance or accounting, thereby ensuring precise and honest reports.
- Members of the audit committee must endorse the company’s financial records and be accountable for any discrepancies.
The Functioning of an Audit Committee
The audit committee collaborates intimately with auditors to verify the accuracy of the company’s financial books and eliminate any conflicts of interest regarding external consulting firms engaged by the company. Ideally, a Certified Public Accountant (CPA) should chair the committee. However, in many cases, this role may be assumed by a retired banker or other financially literate individuals. According to New York Stock Exchange (NYSE) regulations, the audit committee must comprise at least one financial expert.
The committee should hold meetings at least four times a year to review recent audits, convening either in person or via teleconferencing. Additional meetings can be scheduled as needed to address emerging issues.
The audit committee also maintains dialogue with the company’s Chief Financial Officer (CFO) and controller and can initiate special investigations if accounting practices appear dubious or if significant issues involving personnel arise. Internal auditors often assist the committee in these investigations.
Duties include
- Oversight of financial reporting
- Monitoring of accounting policies
- Oversight of external auditors
- Ensuring regulatory compliance
- Discussing risk management policies with management.
Detailed duties and composition of an audit committee can be located in SEC Form DEF 14A, or the company’s proxy statement.
Membership dynamics may evolve due to shifts in personnel on the board or changes in committee assignments. Besides basic director compensation, audit committee members receive additional payment for each meeting attended.
Keeping Focus: Audit Committee Challenges
Audit committee responsibilities transcend financial oversight; they also face numerous challenges that can impact large organizations considerably. Modern complexities, such as the threat of cyber attacks, fall within the audit committee’s jurisdiction, necessitating increased attention on cybersecurity practices by audit committees across corporate landscapes.
Embracing their crucial duties, audit committees play a fundamental role in enhancing the robustness and transparency of corporate financial oversight, influencing overall corporate health and stakeholder trust.
Related Terms: board of directors, auditor, CFO, controller, internal auditor, NYSE, risk management, cybersecurity.
References
- U.S. Securities and Exchange Commission. “Standards relating to listed company audit committees”.
- New York Stock Exchange. “NYSE Corporate Governance Rules”, page 4.
