Events in recent years have significantly influenced corporate governance, including the establishment of a defined audit committee. The most effective audit committees are not only critically aware of their responsibilities, but also completely understand and embrace them, and recognize what is necessary to fulfill them effectively. The work of the audit committee continues to evolve to meet the governance needs as a result of business and banking changes.
Collaboration Is Key
Effective corporate governance depends on the active and collaborative participation of all its principle champions—the audit committee, board of directors, independent external auditors, internal auditors and management. Ensuring that this collaboration occurs economically, efficiently and effectively is fundamental to an audit committee’s success. Its functions and responsibilities, which are approved by the board of directors, vary from institution to institution, but each audit committee’s key responsibilities are essentially the same. In general, audit committees should assume the following responsibilities:
- Understand management’s responsibilities and representations
- Understand and assess the appropriateness of management’s selection of accounting principles and the most critical
- Understand management’s judgments and accounting
estimates applied in financial reporting
- Understand the communications received from the external auditors concerning their responsibilities under generally
accepted auditing standards
- Confer with both management and the external auditors about the financial statements
- Assess whether financial statements are complete and fairly presented, in all material respects, the financial position of the institution and that disclosures are clear and transparent
- Review financial statements and other information presented with financial statements prior to approval
- Pre-approve all allowable non-audit consulting services performed by the external auditor
Best practices in corporate governance recommend that the audit committee’s oversight role be extended beyond the financial statements and related information to include, where practicable, the review of other statements containing financial information and requiring board approval.
Working with External Auditors
The audit committee needs to assure itself that the external auditors are satisfied that the accounting estimates and judgments made by management, and that management’s selection of accounting principles, reflect an appropriate interpretation of U.S. generally accepted accounting principles. The appropriateness—including the degree to which management bias, if any, is evident—of the institution’s accounting principles and underlying estimates, and the transparency of the financial disclosures in reflecting financial performance, would be at the core of discussion between the audit committee and the external auditor. The audit committee should be interested in discussing and understanding the external auditor’s views on accounting issues, and should actively seek to develop a relationship with the external auditor that allows a full, frank and timely discussion of all material issues.
Internal Audit Responsibilities
In addition to the external audit process, the audit committee also oversees the institution’s internal audit process. The audit committee should ensure that the institution’s internal audit function is conducted in accordance with the standards of the Institute of Internal Auditors, and that a regular review is undertaken of internal audit’s performance. The audit committee should attempt to ensure the external audit and internal audit complement each other and that their efforts are coordinated and effective.