The audit committee is a vital force in any established company, especially the publicly Traded Company. The historical perspective in the establishment of the audit committees of the companies dates back to the year 1939 when the New York stock exchange started to establish the audit committee idea. In the year of 1972, the security and exchange commission recommended for the first time that publicly traded companies should establish audit committees. Since then many companies complied with the need of establishing the audit committee which was entrusted with the control of the mismanagement of the financial resources.
The outstanding milestone occurred in the year 2002 by the establishment of the Sarbanes-Oxley Act (Auditing Committee effectiveness, 2000), which has greatly changed the roles played by the audit committees of the publicly traded companies. The audit committee is usually composed of the board of directors; the audit committee is generally the operating committee which is mostly concerned with the financial reporting of any institution. The main aim of the audit committee is to ensure proper financial management of the company involved. Usually, the committee members are selected from the board of directors and the chairperson who is usually in charge of the execution of the duties is selected from the committee members. Moreover, the audit committee in the United Kingdom publicly owned companies is made up of independent directors in addition to the external directors who are generally known as the non-executive directors (National Commission On Fraudulent Financial Reporting, 1987). The non-executive directors should have one financial expert such as an accountant. The audit committee has been given the responsibility of consulting the necessary methods of performing the required duties up to the highest level possible.
The role of the audit committee is gradually taking a new direction as many roles have been put in place which the audit committee needs to control. The roles of the audit committee are currently evolving since the introduction of the Sarbanes-Oxley Act which was established in the year 2002 (Audit committee Institute, 2005). Some audit committees have been empowered with the roles of risk management of some companies. This paper tries to evaluate the roles played by the audit committees in reference to the United Kingdom companies. At the same time, this paper will try to focus on the practices which are carried out by the audit committee to promote the success of their auditing services.
Companies with audit committees
All listed companies in the ASX should have an audit committee at the beginning of every financial year. The composition of the audit committee and the duties of the audit committee should comply with the guidelines of the ASX corporate governance council (Niamh & Michael, 2002). The guidelines of the ASX are usually defined out in the fourth principle of LR12.7 which is sometimes optional to other companies. Small companies and other non-profit organizations may opt to have or not have the audit committee depending on whether the board members are satisfied with the functioning of their organizations and whether there is the presence of risk management or not.
Audit committee’s charter
According to the AICD’s Audit committee’s guidelines, they suggest that the audit committee charter should have the committee’s objectives and the committee’s responsibilities which include the financial reporting, Risk management in the internal and external section, monitoring of the framework guidelines, management of the information systems and preventing the fraud financial irregularities (Thomas, 2002).
Authorities of the audit committee
The audit committee is usually given some authorities which are useful in the decision making by the committee involved. The committee membership, appointment process, and the replacement of the new members are usually controlled by the committee leaders. The committee has the right to get information from all company employees or any external members to help in carrying out the involved investigations. Moreover, the committee has the fundamental right to access all external auditors and the internal auditors at large. Moreover, this committee has the right of seeing the functioning of the auditors. At the same time, the audit committee has the right to arrange the meetings and consequently report the activities which are carried out to the board (Department of Finance, 2001).
The roles of the Auditing committee
The main role of the auditing committee is to enable the board to establish its corporate governance and at the same time supervise the responsibilities carried out in the company financial activities such as the financial reporting, controlling of the internal auditing system, risk analysis and carrying out the internal and the external auditing activities. It can be established that the audit committee is a type of the board sub-committee which has no alternative authority.
The powers of the audit committee are given by the board, but at the same time, the board will take the general responsibility for making the decisions and evaluating the performances of every company. Usually, the audit committee’s roles are contained in the audit charter respectively. According to the ASX Corporate Governance Council outlines, the Audit committee’s charter should be revised on an annual basis so as to promote the effective functioning of the audit committee. Consequently, the charter should be revised and at the same time, the audit committee members should undergo further training to improve their performance. The following are some of the outstanding roles which are carried out by the audit committee.
Financial and accounting reporting
The major role of the audit committee in any publicly-traded company is to carry out the financial and accounting reporting. The audit committee usually will analyze the financial reports of the concerned company. The analysis of the financial reports is carried out on a quarterly or annually basis. Consequently, the audit committee members will establish the complex accounting figures, and thereafter they will analyze the decisions which are made by the company management. At the same time, the audit committee will analyze the accounting principles of the concerned companies. Moreover, the regulation of the accounting practices is analyzed by the audit committee (Financial Reporting Council, 2008).
The audit committees usually will interact with the senior officers of the financial department who are concerned with the financial management such as the general financial officer (New York Stock Exchange, 1983). The audit committee is in a position of analyzing and recommending the functioning capability of the company managers. If some problems in the accounting department are noticed or the personnel management is found to be having some errors a special investigation is conducted using the outside auditors as the consulting resources. At the same time, the external auditors are supposed to report to the auditing committee on some management matters such as the accounting principles of the companies and the problems which they usually encounter in some companies while carrying out their auditing services.
Overseeing the external auditors
The audit committee usually is concerned with the selection and the approval of the external auditor who is commonly known as the public accounting firm (Financial Reporting Council, 2003). The public accounting firms are entitled to the role of reviewing the financial statements on a quarterly basis and at the same time, this body will give the opinion on the validity of the annual financial statements. At the same time before changing the external auditor of the company, the auditing committee has to be notified since they have to approve such changes. Moreover, the auditing committee promotes the independence of the external auditors so as to avoid conflicts of interest by the company which may bring auditing interference.
Overseeing the regulatory compliance
The audit committees are concerned with the regulation of compliance in risk management. These audit committees will analyze the litigation of the companies by briefing or reporting to the general counsels who is the top lawyer of the company. In connection to this, the big companies have a chief compliance officer who serves as the ethics officer. The ethics officer is in charge of reporting the incidents and the risks entities and the code of conduct of the involved financial officers. The audit committees in general will try to see that all involved members of the publicly traded companies adhere to the regulatory codes (American Institute of Certified Public Accountants, 1978).
Monitoring the internal control process
The audit committee has the role of monitoring the internal control process. The internal control processes are the policies and some of the practices which are used to control the operations in the company (American Law Institute, 2004). At the same time, they may include the practices which control the accounting and the regulatory compliance of the company. The internal and external auditors usually will provide the reports to the audit committee. This report contains an analysis of the effectiveness and the working efficiency of the internal auditor’s control.
Overseeing risk management
The auditing committee is entrusted with the role of analyzing and managing any risks which may arise in the company. Most business organizations contain so many functions that carry out the activities aimed at understanding and hence addressing the risks that may hinder the progress of the organization and the objectives of the organization. The policies and practices which are aimed at responding to the company risk are usually evaluated with the audit committee. It has been established that many companies have started to develop some analytical practices with the goal of moving towards the risk-based approach of management. The audit committee has been entitled to the major role of assisting the board of directors of any company in fulfilling the corporate governance duties. At the same time, the audit committee has to carry out the oversight responsibility by evaluating the companies’ financial reports. Consequently, the audit committee will try to analyze the risk management system and the internal auditing control systems (Blue Ribbon Committee, 2003).
Assistance to the company board
The audit committee has the role of assisting the company board in general. The committee should analyze the company’s financial statements and analyze them to see if they have the proper integrity. At the same time, the audit committee will analyze to find whether the company works with legal compliance (Braiotta, L.1986). Moreover, the audit committee analyses the performance of the company’s internal and external auditing procedures. Consequently, the audit committee prepares the company statements in regard to the company’s progress.
Regulatory and legal roles
The audit committee is concerned with the matters concerned with the law like the financial frauds and the protection of the property rights of the concerned companies (Charan, Ram.2005).
The extra roles done by the audit committee include interim reporting; control of the information technology maters such as computer networking and other communication roles which promotes the proper learning of the concerned company. At the same time, the audit committee analyses the officers’ expense accounts (Braiotta, L, 1994).
Role of Audit Committee in preventing credit crisis
The Audit Committee has played an enormous role in trying to prevent the credit crisis in the world at large. The banks which are in a constant issue to be controlled by the Audit committee so that they can not collapse includes the Bank of England, Northern Rock Style Bank, Insurance companies, Firm Tatum LLC, Tractor Supply Company, B&G Foods company, The SEC company and other credit agencies in the United Kingdom (Financial Reporting Council, 2008). The Finance Services Authority should be granted a lot of powers to handle such a credit crisis that is facing the world at this period of economic depression.
The Auditing committee in connection with other auditing training companies has devised concrete methods of preventing frauds in the companies. Such frauds include money laundering, Money mail fraud and fraud. Wireless fraud. The Audit Committee in connection with the risk management of companies has been involved in the control of the market risks, competitions from the related organizations and the general control of natural disasters. Whatever of the reasons behind the current credit crisis in the world, the failure of the regulation and the litigation activities is mostly caused by the financial markets in the year 2009.
The effect of the Sarbanes-Oxley Act on the roles of the audit committee
The Sarbanes-Oxley Act which was established in the year of 2002 has led to an increase in the roles played by the audit committee. This act constantly increased the requirements which one needed to become a committee member and the number of independent directors increased to a greater height. In this case of the Sarbanes-Oxley proposal, the functioning between the management and the external auditors is reversed and the functioning is mainly initiated between the audit committee and the external auditors (Securities and Exchange Commission, 1999). Thus, the audit committees can now directly nominate the independent auditors who are supposed to report to the audit committee directly.
Independence of the directors
According to the Sarbanes-Oxley Act, the members who belong to the audit committee are supposed to be independent in nature (Bristol-Myers Squibb Company,1999). There shall be no interference by the external or internal forces of the company. In this regard, the audit committee members cannot accept any remuneration in the form of a directors’ fee in reward to his or her consultation or any other compensation fee for the services provided. The committee shall not be an affiliate of the publicly-traded company.
Managing the agenda of the audit committee
The audit committee usually will employ the annual agenda in making sure that the activities of the company are carried out in the required manner. The establishment of the agenda is drawn between the board of directors, the management board, the legal officers, and the external and internal auditors. The committee is required to have their own goals and perspectives which are addressed in the annual agenda (The Audit Committee Tool kit, 2004).
Frequency association with the management
The audit committee’s chairpersons are consequently involved in the general meetings with the management of the companies. Some of the board members have been found to be involved in arranging for social feasts to improve the interactions between the two subjects. Moreover, there is the occurrence of executive sessions between the committee members and the external auditors. At the same time, the audit committee performs the performance evaluation every year.
The roles of the audit committee in publicly traded companies are quite enormous in nature. It has been shown that the audit committee acts as the backbone in the control of fund misuse. Without the presence of the audit committee, most of the companies may have undergone the collapsing zone. However nowadays the roles of the audit committee have changed.
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