Audit Committee
IntermediateAn audit committee is a committee of a company’s board of directors, usually made up of independent directors, responsible for overseeing financial reporting, internal controls, risk management and the relationship with the external auditor.
The audit committee provides focused oversight of the integrity of a company’s financial statements. Its typical responsibilities include reviewing the financial statements and key accounting judgments, overseeing internal controls and the internal audit function, recommending the appointment of the external auditor, approving audit fees and non-audit services, reviewing the auditor’s findings and overseeing whistleblowing arrangements.
For example, if management proposes a significant change in how revenue is recognised, the audit committee would review the reasoning, discuss it with the external auditor and challenge management if needed before the accounts are approved.
Rules for listed companies in many countries require audit committees to consist of independent directors, at least one of whom has recent and relevant financial experience. In the United States, these requirements were strengthened by the Sarbanes-Oxley Act.
An effective audit committee helps prevent accounting errors and fraud and increases investor confidence. Its members need financial knowledge, independence from management and enough time to scrutinise complex issues.
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