Audit committee members are responsible for performing a wide variety of duties. In the course of their duties, they work closely with the board, managers, internal auditors, independent auditors, risk managers and many others to ensure that the company has sound financial reporting practices and robust internal controls. Audit committee responsibilities encompass many oversight responsibilities, including fraud prevention, ethics and compliance, oversight of the independent auditor and involvement with external communications.
Oversight of Financial Reporting and Related Internal Controls
Serving on an audit committee requires committee members to be familiar with the processes and controls that management has put into place for financial reporting and internal controls. The role of the audit committee requires them to work with members of management, independent auditors and internal auditors to acquire adequate knowledge about the company’s financial reporting and internal controls. The committee uses this information to determine whether the company’s financial reporting processes are designed and operating effectively.
Audit committee responsibilities require committee members to know and understand NYSE and NASDAQ auditing requirements. Regulations require audit committees to review any significant changes in accounting principles and the adequacy of internal controls. Audit committee duties include reviewing the company’s response to material control deficiencies and reviewing the effects of alternative GAAP methods with management. NASDAQ requires audit committees to disclose the audit committee’s purpose as stated in its charter.
All companies should have programs and policies in place to identify and prevent fraud. Audit committees provide the appropriate oversight for fraud detection and prevention. In addition, audit committees must ensure that their company has a strong ethics and compliance program and an established reporting hotline. Audit committee members must educate themselves about the most common types of corporate fraud and know how and where to find them if they exist.
Audit Committee Responsibilities for a Review of Filings and Earnings Releases
Financial analysts, ratings agencies and other financial experts rely on audit committees to oversee earnings releases, SEC filings containing financial information and other financial reports to ensure that they’re transparent and fair.
Among the things that audit committees should be looking for is consistent tone and messaging across all financial communications.
Audit committee teams are also responsible for working with legal teams to ensure that disclosures are accurate and complete and include reporting on financial trends. Duties require audit committee members to consider compliance with compensation policies on forward-looking statements and ensure that disclaimers are complete and up-to-date. In addition, audit committees should consider whether they need to enhance the disclosures in their proxy statements.
Regulators require audit committees to meet with management and the independent auditor to discuss the annual audited financial statements and the quarterly financial statements.
Audit committees also spend their time in discussing earnings press releases and financial information and guidance with analysts and rating agencies. Audit committee members must also be aware of the SEC rules that require them to make recommendations to the board that audited financial statements should be included in the company’s annual report on Form 10-K.
Risk Oversight
The audit committee plays an important role in overseeing risk management activities. Management is largely responsible for risk management activities. The audit committee is responsible for ensuring that the company’s risk management plan is well-defined and effective. Discussions with management should include discussing the company’s policies and guidelines that govern risk management. Both parties should be knowledgeable about major financial risk exposures and steps that managers should be taking to monitor and control risks.
Risk management duties for audit committees extend to overseeing the company’s cyber risk management program.
Ethics and Compliance
Nearly all companies have some form of code of conduct or code of ethics policies within their bylaws. It’s the responsibility of the audit committee to ensure that the policy is strictly enforced. This responsibility requires audit committee members to address allegations or violations of the code of ethics in a prompt and consistent manner. Audit committees must ensure protection for individuals who come forth with reports of questionable behavior by employees. Codes of conduct should state the company’s standards clearly and objectively. The company must have a fair process for addressing violations of ethics or compliance.
Oversight of the Independent Auditor
An essential part of the audit committee duties is to be responsible for appointing, compensating and overseeing the duties of the independent auditor. This responsibility extends to resolving any disagreements with management. Audit committee members should be meeting with the independent auditor at least quarterly to discuss issues related to financial reporting, internal controls and audits.
Audit committee responsibilities also include the requirement of committee members to be aware of NYSE, NASDAQ and PCAOB requirements for communications between the audit committee and the independent auditor.
Oversight of Internal Audit
Audit committee members must devote part of their duties to performing internal audit evaluations. Their role also requires them to make suggestions on how to improve the company’s internal operations and processes. Proper oversight of the internal audit requires companies to enlist the help of independent internal auditors to ensure the integrity and transparency of the processes.
Oversight over the internal audit includes objectively monitoring and reporting on the health of financial, operational and compliance controls. Audit committees should be able to work with others toward strengthening internal controls.
Other Interactions With Management and the Board
As audit committee members work closely with key finance executives, they’re often called on to provide input on the performance of C-suite-level executives in the financial space. Their input may include offering insight about the succession planning process for financial executives.
Audit committee members may also be instrumental in providing valuable input into the goal-setting process for boards and managers as it pertains to early identification and resolution of accounting and other issues.
Software Solutions for Total Enterprise Risk Management
Audit committee responsibilities are overarching, varied and vital for good corporate governance. Diligent Corporation developed a suite of software solutions to meet all the needs of audit committees. Governance Cloud provides an electronic platform for the most secure and intuitive solution to enterprise risk management. The platform enables audit committee members to access financial reports in real time at all times.
Diligent Boards gives audit committee members the ability to control their board documents much more easily than jumbling paper documents. The platform promotes organization and efficiency that allows audit committees to more easily make the decisions and recommendations that are so vital to carrying out their responsibilities.
