Audit Committee

Quick Summary of Audit Committee

The corporate audit committee serves as a liaison between management, the board of directors, internal and external auditors, and any other accounting experts advising the company on audit issues. The audit committee, in particular, is in charge of hiring and managing external auditors. Since Congress passed the Sarbanes-Oxley Act in 2002, enacting stringent financial oversight regulations, the audit committee’s role has grown in importance. An audit committee is a subset of the corporation’s board of directors. Members of the audit committee must be independent, which means they have no ties to the management team of the company. Except for a board of director’s fee, they cannot receive any compensation, such as consulting or advisory fees. They may not be able to own stock in the company or be affiliated with it in any other way. They cannot also be affiliated with or have a stake in the external auditing firm.

In a publicly-held company, an audit committee is an operating committee. Committee members are normally drawn from members of the Company’s board of directors. An audit committee of a publicly-traded company in the United States is composed of independent and outside directors referred to as non-executive directors.

Not for profit entities will also often have an audit committee. Committee members will be drawn from the organization’s governing board (e.g., Board of Trustees). As a best practice, employees who serve on the governing board will not serve on the audit committee.

Responsibilities of the audit committee typically include:

• Overseeing the financial reporting process.
• Monitoring the choice of accounting policies and principles.
• Monitoring internal control process.
• Overseeing the hiring and performance of the external auditors
• Arranging for a standard ‘whistle-blowing’ procedure.

The U.S. Securities and Exchange Commission (SEC) first recommended that publicly held companies establish audit committees in 1972. The stock exchanges followed in 1978 by either requiring or recommending that companies establish audit committees. Over the years, various initiatives to strengthen and increase the responsibilities of audit committees have been made.

In 2002, the Sarbanes-Oxley Act increased audit committees’ responsibilities and authority, and raised membership requirements and committee composition to include more independent directors. In response, the SEC and the stock exchanges proposed new regulations and rules to strengthen audit committees.

Current costs of Sarbanes Oxley compliance are estimated at over $6 Billion per annum.

The duties of an audit committee are typically spelt-out in a committee charter, often available on the entity’s website.

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