Board committee charters have most of the same components. An audit committee charter veers slightly from the traditional format of a board committee charter because an audit committee entails a lengthy list of vital duties and responsibilities. Many of an audit committee’s duties and responsibilities relate to regulatory and legal requirements, so it’s important that such duties be clearly detailed and outlined in the audit committee charter. A board portal and electronic governance software solutions are the best tools for audit committees to manage the scope of their duties responsibly.
The basic components of an audit committee charter are the purpose, membership, meetings, reporting, authority, and duties and responsibilities. Due to the lengthy list of duties and responsibilities, boards may opt to detail the committee’s tasks in another document, such as an audit committee meeting planner.
The list of audit committee duties and responsibilities should state the committee’s expectations for complying with the SEC Exchange Act, the Sarbanes-Oxley Act of 2002, and the listing standards of the NYSE and the NASDAQ.
Corporate management is responsible for preparing and presenting financial statements and for preserving the integrity of the financial reporting process. Management is also responsible for ensuring adequate internal controls and managing financial risks. Independent auditors are responsible for auditing the company’s financial statements and for reviewing the company’s regular financial statements. The primary responsibility of the audit committee is to oversee management and the independent auditors in carrying out their duties.
It’s highly recommended that companies obtain legal advice when developing and reviewing the audit committee charter and revise it as recommended.
Components of an Audit Committee Charter
An audit committee charter begins in much the same way as other board committee charters.
The first section of the charter is typically the purpose statement or mission statement. This component is usually in narrative form. The purpose section describes the audit committee’s role in overseeing the financial reporting and internal controls of the company as it pertains to the board’s role in being responsible to its shareholders and others within the investment community.
Included in the audit committee’s purpose is to preserve the integrity of the company’s financial statements, maintain its effectiveness over internal controls and financial reporting, ensure that the company is in continual compliance with legal and regulatory requirements, ensure that auditors are independent and sufficiently qualified, and oversee the performance of the internal audit function.
In addition, the purpose statement should note that the audit committee is responsible for managing the independent auditor as well as for preparing the audit committee report for the annual proxy statement.
The next section after the purpose statement is the one that describes how audit committee meetings will be organized. This section will typically describe in narrative form that the audit committee will meet separately and periodically with members of management, the internal auditors and the independent auditors as necessary to fulfill their duties and responsibilities as outlined in the charter.
This section will also detail how frequently the audit committee meets, which is usually at least quarterly. The meetings section may also note how frequently the audit committee will make a formal report to the board of directors.
Audit Committee Composition
The audit committee has stricter requirements for committee composition than any other board committee. The Exchange Act requires all members of the audit committee to be independent board members. Along those lines, the Securities and Exchange Commission (SEC) requires at least one member of the audit committee to meet their definition of “financial expert.” Regulations also require all committee members to either be financially literate or to become financially literate within a reasonable period.
Most audit committee charters will state that there should be at least three members on the committee, with each serving a three- or four-year term. Either the board appoints the audit committee chair or the committee may appoint a committee chair on its own.
Most companies frown on audit committee members serving on more than three public company audit committees unless the board determines that such a member’s service to their audit committee wouldn’t be compromised because of the demands of simultaneous service.
Duties and Responsibilities
The audit committee charter’s section on duties and responsibilities is the longest section of the charter. The following information outlines six categories of duties and responsibilities and describes some of the primary duties in each category. An audit committee charter will outline the exact duties and responsibilities that the board expects the audit committee to fill, which are numerous.
EY provides an appropriate sample of an audit committee charter.
Risk Management and Controls
While senior managers are responsible for managing risks, the audit committee is responsible for overseeing major financial risks, especially those involving identifying and preventing fraud. The section on audit committee duties related to risk management and controls includes overseeing management’s strategies for monitoring and controlling financial risks and reviewing antifraud programs and controls.
Audit committees are responsible for having discussions with internal and independent auditors about the overall scope and plans for respective audits, including the adequacy of staffing, compensation and budgets for the audit processes.
Financial Reporting and Disclosures
Audit committees are responsible for reviewing and overseeing financial reports and disclosures on a quarterly basis. They must also look for material weaknesses and significant deficiencies in internal controls and monitor remediation plans. Members of audit committees review accounting methods to ensure that they’re complete, accurate and timely. The committee also reviews the financial information and earnings guidance that the company provides to financial analysts and rating agencies.
Independent Auditor Oversight and Responsibilities
Audit committees are directly responsible for appointing, compensating, retaining and overseeing the independent auditor in preparing the annual audit report and other related duties. An audit committee must also ensure that the company’s auditing procedures meet the rules of the NYSE, the NASDAQ and the Public Company Accounting Oversight Board (PCAOB).
Internal Audit Oversight and Responsibilities
Among various other internal audit oversight duties, audit committees are responsible for reviewing and approving the internal audit department’s annual audit plan and any major changes to it.
Something that is of great importance to the company is having strong oversight of the company’s ethics and code of conduct policies. Boards give their audit committees the responsibility for ensuring that the company complies with all legal and regulatory requirements related to ethics and a code of conduct.
For audit committees to conduct their duties responsibly, audit committee charters should detail the fact that audit committees should have full access to all company books, records and personnel as needed to fulfill their duties. In addition, the audit committee charter gives committee members the authority to use special counsel or outside experts as needed and also details that boards should give the audit committee sufficient funds to hire outside experts as needed.
The generic nature of this article is intentional, as each company should customize its audit committee charter to the exact needs of the company. The outline provides a basic template for companies to expand on.