With the current economic climate, it is imperative for companies to have a strong audit committee to provide oversight of the financial reporting and audit processes and to monitor a company’s internal controls and compliance with laws and regulations.  An audit committee is required for all listed publicly traded companies in the United States and highly recommended for all other companies, no matter the size of the organization.  

Why Should a Company Have an Audit Committee?

The oversight of a strong audit committee is considered a crucial part of creating a secure control environment for an organization.  An active audit committee sends a message to all within an organization that ethical practices are important and imperative for the company to operate and that controls will be set and monitored to ensure the company operates as required by law.  Audit committee members should communicate to management and employees the diligence expected in proper financial reporting. Committee oversight should be performed with skepticism and a commitment to asking the tough questions of management. There should be a view toward preventative measures to keep the controls in check.  The response of the committee is an example to all within the organization that responsible ethical behavior is expected of all.  

What Characteristics are Needed in an Audit Committee Member?

To adequately fill the role of audit committee member, he or she must have an in-depth knowledge of the company, maintain an unbiased perspective and function with a high level of integrity.  A strong candidate will bring strong business and industry knowledge and experience to the committee. Committee members must be willing to take a high level of involvement in the oversight of the organization, including communicating constructively with management, external auditors and internal auditors.   The ability to communicate with members of the board of directors, regulatory agencies, donors (if applicable) and other members of the general public is expected of a strong audit committee member. Additionally, members of the audit committee must be independent of the organization, in fact and in appearance.  Maintaining this independence can be a challenge but a committee member with impaired independence weakens the committee’s ability to be completely objective in decision making.

What are Some of the Duties of the Audit Committee?

The audit committee is responsible for appointing the external auditors, approving compensation for the audit services, and overseeing their performance.  The audit committee also approves any non-audit work to be completed by the external auditors. Overseeing the work of the internal audit department (if the organization has one) is also the responsibility of the audit committee.  This work includes the review of the annual internal audit plan. The audit committee communicates audit results with management and is also in charge of reviewing the internal controls over financial reporting, operational matters and information technology security in some organizations.  Additional responsibilities may include establishing and monitoring complaints and comments involving the organization’s accounting and financial reporting as well as overseeing legal and compliance issues as they arise.

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