The quality of financial reports is key to confident and informed markets. The purpose of the independent audit is to provide confidence in the quality of financial reports.
In recent times, there has been much discussion about the role of the auditor and their independence to the company in the preparation and approval of financial reports. If a company fails and its financial report did not properly show its declining financial position and results and/or going concern issues, it is reasonable for questions to be asked about the role played by different stakeholders including management, directors, the external auditor and the company’s audit committee.
External auditors must obtain reasonable assurance that financial reports are free of material misstatement, apply sufficient scepticism to accounting estimates and treatments, and address any deficiencies detected so investors and other users of financial reports can have confidence in the quality of the information they contain.
However, it’s clear company directors are responsible for the quality of financial reporting with the support of audit, financial and risk management committees where appropriate.
Audit committees have an essential role to play in ensuring the integrity and transparency of corporate reporting. In Australia, the Australian Securities Exchange requires companies in the S&P/ASX All Ordinaries Index to have a properly constituted audit committee (ASX Listing Rule 12.7). There is no legal requirement to establish an audit committee for not-for-profit organisations and if an organisation is small, then it may not be necessary to have one.
For other businesses, not having an audit committee is an acceptable decision so long as board members are confident there are appropriate board processes in place to raise issues which would otherwise be considered by such a committee. Board members or committees with strong financial management experience are essential in any case. They may not be accountants, but they should certainly have strong analytical skills.
A large part of an audit committee’s role is to create a link between the board and the external/internal auditors where applicable. Key areas of focus are outlined below:
- Audit issues
- Facilitating communication between the board of directors and the internal and external auditors;
- Facilitating the maintenance of the independence of the external auditor;
- Consideration of significant matters raised during the audit process;
- Making a recommendation to the board regarding the appointment or dismissal of an auditor for the following year;
- Providing a structured reporting line for internal audit and facilitating the independence of the internal auditor (if the organisation has an internal audit function);
- Reviewing and maintaining an appropriate Internal control system.
- Financial management issues
- Reporting of financial information to users of financial reports;
- Application of accounting policies;
- Financial management processes and procedures;
- Monitoring the financial position and performance of the organisation;
- Guiding the annual budget;
- Providing a formal forum for communication between the board of directors and senior financial management
- Investment management issues
- Develop and review board policies that guide management in the investment activity of the organisation, outlining: Delegated authority;- Acceptable risk;- Internal controls.
- Risk management issues
- Risk management system;
- Insurance coverage for the organisation and the directors and officers;
- Compliance with applicable laws, regulations, standards and best practice guidelines.
- Other responsibilities
- Perform other activities related to this charter as requested by the board;
- Review and assess the adequacy of Audit & Risk Committee Charter annually, requesting board approval for changes, and ensure appropriate disclosure as may be required by law or regulations;
- Confirm annually that all responsibilities outlined in this charter have been carried out;
- Evaluate the performance of the audit committee and its members on a regular basis.
If an organisation does not have an audit committee, it may still decide it is necessary to establish a finance committee and/or a risk committee. These committees are often combined and take on the role and responsibility of oversighting the development of a budget, monitoring the organisation’s financial position and performance, and establishing and monitoring an appropriate risk management framework.
The relationship between external auditor and the audit committee is clear. The audit committee is responsible for the appointment, compensation, and oversight of the work of the auditor. As such, auditors should report directly to the audit committee, not management.
In a highly charged regulatory environment which is affecting the level of trust in the audit process, a key action external auditors can recommend is for organisations to establish an audit committee to oversee internal processes involved in the development and management of financial reports.
The ASIC is committed to working with auditors to improve confidence levels surrounding statutory financial reporting. A collaborative approach between companies, auditors and The ASIC is the only way to achieve desired outcomes for shareholders. Whilst the audit committee appoints and works with the external auditor on behalf of the company, the auditor should be prepared to make recommendations in relation to financial and risk management.
The team at National Audits Group has a great deal of experience working with the audit, finance and risk management committees of their clients to ensure the best possible outcomes for all stakeholders.
For further information, contact our team at Ph 1300 734 707.
Steven Watson – Managing Director, National Audits Group