a) The roles of an audit committee might include:
• To review the company's financial statements prior to their submission to the board;
• To review the scope and planning of the audit;
• To review the findings of the independent auditor;
• To ascertain whether the accounting and reporting policies of the company are in accordance with legal requirements and best practice;
• To keep under review the effectiveness of the company's systems of accounting and control;
• To make recommendations to the board concerning the appointment and remuneration of the independent auditors;
A particular role is to assist in the communication process between the board and the auditors throughout the medium of the non-executive directors and it provides a useful way of assisting the latter in the discharge of their duties.
b) The benefits may include
• helping directors to meet their legal responsibilities. Very often main boards spend very little time on reviewing the financial statements. An audit committee could spend the time on completing this task in depth;
• enabling non-executive directors to become deeply involved in the company's affairs;
• the audit committee can review the financial statements objectively. This may improve the quality of financial reporting and improve public confidence;
• The audit function may become more independent as there will be a quasi-independent body between the board and the auditors. It may paradoxically improve communications between auditor and board;
• Improvement in the quality of the accounting and auditing functions. A continuous review of the functions of financial management and internal and external audit will inevitably result in higher status to the practitioners and superior performance.
c) Some of the arguments against the formation of Audit Committees
• Audit committees would split the board;
• Audit committees would pre-empt (and hence delay the coming) of two-tier boards (which is the European practice);
• Audit committees would create conflicts within companies;
• Audit committees would encroach on management's responsibilities;
• Audit committees would be a talking shop with no real power;
• There are not enough non-executive directors;
• Audit committees would take too much time and cost too much;
• Audit committees would be least effective in companies which need them most (e.g. companies dominated by ambitious and unscrupulous entrepreneurs).
• The production of financial statements may be delayed.
d) Detailed matters to be considered by the Chairman of a new audit committee
• Ensuring the committee has the full backing of the board;
• The precise constitution and program of the committee;
• Adequate resources (secretarial, communication, time etc must be made available);
• The correct number of members. Three to five is probably optimal;
• Membership - probably but not essentially non-executive;
• His own role as chairman;
• The frequency of meetings;
• The establishment of agendas;
• The establishment of administrative arrangement - calling meetings, involving other people, auditors, managers etc. taking minutes;
• The dissemination of findings to the offers responsible for changes consequent upon the findings.
• The relationships required with the main board, external audit, internal audit, financial managers etc.
• any publicity requirements.