An Audit Committee: What Is It?

One of the central working committees of the board of directors of a corporation that is in charge of monitoring financial transparency and reporting is the audit committee.

To be listed on the stock market, all publicly traded firms in the United States must have a certified audit committee. Independent outside directors, including at least one person who meets the requirements for financial expertise, must comprise the committee’s membership.

The Function of an Audit Committee

To make sure that the business’s records are accurate and that there are no conflicts of interest between the auditors and any outside consulting companies the company hires, the audit committee works closely with the auditors. The audit committee’s chair should ideally be a Certified Public Accountant (CPA). But frequently, a CPA—let alone a member of the board of directors—is unavailable for the audit committee. According to the New York Stock Exchange (NYSE), the audit committee must have a financial specialist.

However, retired bankers usually fulfill this need despite their perhaps subpar capacity to detect fraud. The committee shall evaluate the most recent audit at least four times yearly, either in person or by teleconference. If further matters need to be discussed, another meeting should be called.

The chief financial officer (CFO) and business controller are in constant contact with the audit committee. If the committee finds that accounting procedures are questionable or troublesome, or if significant problems with workers emerge, it can launch special investigations. The committee would get help from an internal auditor in their endeavors.

The audit committee is responsible for overseeing financial reporting, keeping an eye on accounting rules, supervising any outside auditors, maintaining regulatory compliance, and conferring with management on risk management procedures. SEC Form DEF 14A, sometimes known as a proxy statement, contains the responsibilities and makeup of an audit committee for an organization.

Occasionally, committee assignments or personnel changes may result in a difference in the committee’s composition. In addition to directors’ yearly salaries, audit committee members receive extra remuneration for each meeting they attend (this is the case for all committees).

Risks for Audit Committees

The audit committee needs to be serious about its duties. Risk management, compliance, and financial reporting are all vulnerable to various threats, particularly in large organizations with thousands of employees and global reporting systems. An audit committee handles external dangers like cyber hacking, which makes its work even more difficult. Everywhere in business boardrooms, audit committees should pay more attention to cybersecurity.

Conclusion

• A company’s board of directors members form the audit committee, which oversees the company’s financial reporting and statements.
• To provide truthful and accurate reports, the audit committee is required by law to consist of outside board members in addition to those with experience in finance or accounting.
• Committee members are accountable for any misreporting and must approve the company’s records.