What do Board Members Need to Know About Audit Committees?

Well-established work of the audit committee is one of the essential tools of the corporate governance system. The article discusses the basic principles of organizing the work of the Audit Committee, its powers, and the procedure for forming.

Audit committees in the corporate governance

The corporate governance system aims to conduct business efficiently and responsibly and create value for all stakeholders. The board of directors is a crucial link in the corporate governance system. The competence of the board of directors includes making decisions on issues of priority importance for the company’s development. In this regard, there are special committees under the board of 

The Audit Committee ensures the study and preliminary consideration of all the most important issues of the company’s work and issues related to control over its financial and economic activities. The Committee is a consultative and advisory body of the board. It is created primarily for preliminary consideration of the most significant issues within the competence of the boards, as well as to ensure the effective functioning of the company’s internal control system, risk management, and compliance with regulatory requirements.

Board members have access to information about the work of committees and the possibility of attending meetings of any committees. The directors exercise this right in practice: as a rule, consideration of complex issues takes place in an expanded format, and the discussions are attended by the majority of the members of the board and management representatives with the necessary competencies.

Main tasks of the Audit Committee

The Audit Committee is an important factor in successfully implementing three of the four functions of the generally accepted corporate governance model. The main task of the –°ommittee is to exercise supervision (oversight) on behalf of the company’s board of directors over the financial aspects of the company’s activities and the proper functioning of internal control and risk management systems.

To fulfill the tasks assigned to the audit committee, the Committee must be professionally formed both in terms of its composition and in terms of documents regulating its status and competence:

  • the audit committee includes only independent directors, at least one of whom is a financial specialist;
  • a well-written and approved by the board of directors regulation on the audit committee will help determine the role, terms of reference of the Committee, and the rules for its interaction with other services and divisions of the company;
  • A collegially drawn-up work plan of the Committee will ensure the regularity of meetings and the coverage of all the tasks facing the Committee.

The Committee manages the relationship with the external auditor on behalf of the Board of Directors. It also reviews the reappointment of the External Auditor each year, remuneration, and other conditions of appointment and makes recommendations to the Board of Directors or the Managing Director. Shareholders are requested to approve the re-appointment of the auditor each year at the annual general meeting.

The Committee receives the following powers from the board of directors:

  • request any information from any employee (and all employees are required to provide CPA with any requested information) and third parties;
  • involve third-party consultants on legal and other issues of professional activity;
  • ensure the presence of members of the company’s management at meetings of the Committee following the need;
  • conduct any investigations on matters within its competence.

Moreover, the Committee should regularly evaluate the effectiveness of its activities, comparing the results achieved with the tasks set for the Committee in its regulation and work plan.

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