Audit committees
The role of audit committees has been significantly developed in the
UK following the Cadbury Report on corporate governance in the early
1990s and the later Smith Report on the role of audit committees. The
current framework is to be found in the UK Corporate Governance Code
(see www.frc.org.uk/Our-Work/Publications/Corporate-Governance/
UK-Corporate-Governance-Code-September-2012.pdf and www.frc.org.
uk/Our-Work/Publications/Corporate-Governance/Guidance-on-Audit-
Committees-September-2012.aspx).
The code states that the committee should comprise at least three
independent non-executive directors (not including the company
chairman). The role of the committee is to:
• review the company’s internal financial controls and, unless
expressly addressed by a separate board risk committee composed of
independent directors, or by the board itself, review the company’s
internal control and risk management systems
• monitor and review the effectiveness of the company’s internal audit
function
• make recommendations to the board to put to the shareholders for
their approval in general meeting, in relation to the appointment, reappointment
and removal of the external auditor and to approve the
remuneration and terms of engagement of the external auditor
• review and monitor the external auditor’s independence and
objectivity and the effectiveness of the audit process, taking into
consideration relevant UK professional and regulatory requirements
• monitor the integrity of the financial statements of the company,
and any formal announcements relating to the company’s financial
performance, reviewing significant financial reporting judgements
contained in them
• develop and implement policy on the engagement of the external
auditor to supply non-audit services, taking into account relevant
ethical guidance regarding the provision of non-audit services by the
external audit firm
• report to the board, identifying any matters in respect of which
it considers that action or improvement is needed and making
recommendations as to the steps to be taken.
The committee should:
• have meetings which are only open to committee members
• be adequately resourced
• include at least one member with experience as an auditor or finance
director
• report unsatisfactory findings to the board.
Possible problems
1. How are companies to ensure that only those with sufficient
competence are appointed to serve on audit committees?
2. How are companies to attract candidates with sufficient independence
from the company itself and from senior management (for example,
questions have been raised about the independence of individuals in
the Hollinger/Lord Black case in the USA and the Northern Rock affair
in the UK)?
3. There has also been concern that additional governance
structures such as audit committees will inhibit executive flair and
entrepreneurial risk-taking.
4. The cost of compliance with the governance rules may dissuade some
companies from seeking listings.
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