What is meant by audit committee who are its members and what are its responsibilities?

Audits can be a headache for any organization. For banks and other companies in heavily-regulated industries, audits can quickly eat up a disproportionate amount of a board’s time and focus. Chartering a specialized committee can ease the headache of routine audits. So let’s take a closer look at everything your board needs to know about audit committees.

What is an Audit?

If you’re reading this article, you probably already know what an audit is. Nonetheless, it’s important we make clear that our focus, today, centers solely around financial or tax audits of an organization — audits that concern money. Merriam-Webster lists two definitions for the word “audit”: the financial definition and the general-purpose definition. Generally-speaking an audit is simply a “methodical examination and review”. An organization may choose to audit anything. Common areas of focus for audits outside of a financial context include information technology (IT), environmental impact, and operational audits. Now that’s out of the way, we’ll be focusing on financial and tax audits when discussing the role of an audit committee.

What is an Audit Committee?

The role of an audit committee often differs from country to country. The SEC requires all publicly-traded companies operating within the United States to not only have an audit committee, but have one that meets a strict set of requirements. In the US, audit committees tend to focus almost entirely on overseeing an organization’s financial reporting and disclosures. However, the committee’s functions may be expanded to include elements of risk management, the selection of external auditors, and reviewing or reporting on the results of a completed audit.

Audit committees are often comprised of directors with an extensive background in finance, accountancy, or compliance. As regulators often require the size of the committee to be fairly small, directors are almost always appointed for their expertise (as opposed to who they know). The audit committee is often in close communication with several key employees of an organization, namely the Chief Financial Operator (CFO), the accounting and finance teams, and the controller.

In most cases, it is important that the audit committee be comprised of independent outside directors. This means it’s made up of directors who do not work for the company or have any material or financial relationship with the company. Ensuring that members of an audit committee remain independent is important in ensuring that everything operates “above board” (pun intended). It means that no rules are bent or broken in order to remain aligned with the organization’s financial interests.

The Duties of an Audit Committee

Again, regulators may require an audit committee to perform a specific set of duties. More often than not, these duties eat up most of the committee members’ time. In the US, the Securities and Exchange Commission (SEC) is one of the biggest regulators of organizational audit committees. The SEC lists a strict set of duties and responsibilities that must be incorporated into the charter of an organization’s audit committee. These duties and responsibilities can vary based on the stock exchange with which an organization’s securities are traded (meaning the New York Stock Exchange (NYSE) has a different set of requirements than the Nasdaq).

Compared to the New York Stock Exchange, the Nasdaq places a much greater emphasis on ensuring the independence of committee members. On the other hand, the NYSE is more strict in other aspects of its regulatory demands (such as its requirements for how executive sessions are structured).

Regardless of where a company’s stock is traded, the audit committee is held responsible for performing a very specific set of duties and responsibilities, such as:

• Overseeing the organization’s accounting practices,
• Facilitating the organization’s financial reporting,
• Overseeing any financial audits, and
• Maintaining compliance with regulatory standards and requirements.

The requirements placed on publicly-traded companies direct a lot of focus towards the charter of an audit committee. With focus comes pressure. Committee charters often need to be written with a meticulous attention to detail, accounting for each of the standards and requirements laid out by an organization’s regulators.

Outside of the duties an audit committee may be required to perform, they are often assigned a series of related tasks and responsibilities. These responsibilities may include the selection of internal and external auditors, the interpretation and presentation of audit results, risk management, and investigating any suspicious activity within the organization. How an audit committee chooses to balance these activities largely depends on their location, their regulators, and whether they are publicly or privately owned.

The Role of Compliance

Complying with regulatory demands is one of the biggest headaches an audit committee is likely to encounter. Depending on the industry, the role of compliance can differ vastly. Different industries often answer to different regulators and different regulators may demonstrate very different levels of scrutiny and regulatory zeal.

Remaining in compliance often means gaining an extensive knowledge of the mountain of rules, regulations, and requirements an organization is expected to uphold. Ensuring an organization adheres to these rules and regs is almost guaranteed to be a daunting task. Beyond that, an audit committee is expected to keep track of and adapt to the multiple additions, omissions, and revisions that regulators may introduce over the course of a given year. The challenge of remaining in compliance has led many organizations to appoint a Chief Compliance Officer (CCO) to serve as a liaison between an organization and its audit committee. In some cases, a small team of compliance specialist may be employed to assist with this process.

Empowering Audit Committees

Serving on the audit committee is a tough job. Its directors are almost guaranteed to face year-round stress. That’s why supporting and empowering the members of your organization’s audit committee can make a world of difference. The role of the audit committee often requires its members to collect, evaluate, and share vast amounts of information. Establishing strong communication with regulators, third-party auditors, and the organization’s staff members and executive officers is critical.

Investing in powerful, easy-to-use board management software can make a huge dent in empowering an audit committee. Board portals keep communications secure, which is significant as cybersecurity becomes a mounting concern for many boards of directors. Board management software like Directorpoint also allows administrators to configure a user’s access and permissions such that information can be made immediately available to auditors and regulators without allowing them to see more than the intended materials. This can significantly reduce the headache of the auditing cycle. Directorpoint is one of the few board portals to allow board and committee members to add their executive assistants to the platform without charging them an additional licensing fee. Allowing trusted EAs to access an audit committee’s secure materials removes much of the stress surrounding communications between directors, employees, auditors, and regulators. Finally, a quality board management software will incorporate robust search capabilities, allowing members of an audit committee to pluck a needle out of a haystack in the blink of an eye.

If you’re interested in learning more about how Directorpoint’s seamlessly-designed board management software might benefit your audit committee (not to mention its board of directors), schedule your free demo today! For questions or to learn how Directorpoint is helping organizations make better decisions across the board, contact us online or call (888) 492-7020 to speak to a board technology expert!