Who does an audit committee report to

Composed of individuals who serve on an organization’s board, an audit committee is responsible for ensuring an organization operates in an ethical environment and complies with laws and regulations. Charged with oversight of financial reporting, risk management and internal controls, audit committees also are responsible for selecting the public accounting firms that serve as their organizations’ external auditors as well as for maintaining relationships with their organization’s own internal audit team.

The essential nature of audit committee responsibilities was reinforced in 2002 with the passage of the Sarbanes-Oxley Act, which significantly strengthened the role of audit committees in organizational governance. Individuals who pursue an online Master of Accountancy degree can acquire knowledge and skills that could be beneficial when they interact with and report to audit committees.

Audit Committee Role and Duties

The breadth of an audit committee’s role and duties is demonstrated by its responsibilities. Some of the most significant responsibilities under the purview of an audit committee include the following:

• Ensuring the organization’s financial statements are understandable and reliable.
• Ensuring the organization establishes a thorough risk management process and effective internal controls.
• Reviewing the organization’s policies, particularly in areas such as ethics, conflict of interest and fraud.
• Reviewing the organization’s litigation and regulatory proceedings.
• Selecting and implementing a direct reporting relationship with the public accounting firm that serves as the organization’s external auditor.
• Establishing communication with the organization’s internal auditor and reviewing all audit findings.

Audit committees also play a significant role in setting the tone of an organization. They do so by ensuring their organizations develop and implement a code of conduct and establish effective communication channels. Audit committee members also need to be aware of what management is doing to achieve compliance with laws and regulations, and they must be knowledgeable about issues such as ongoing investigations and disciplinary actions.

With such a broad scope of responsibilities, these committees can face significant challenges. In its 2019 survey of 1,300 audit committee members worldwide, KPMG identified two of the greatest challenges to audit committees performing their core oversight responsibilities:

• Maintaining internal control over financial reporting, disclosure controls and procedures.
• Helping ensure their organization has the talent and resources to maintain quality financial reporting.

KPMG also reported that audit committee members viewed technological innovation, digital disruption and the complexity of business as the factors that place the most pressure on risk management and internal controls.

How an Audit Committee Operates

The charter an audit committee establishes sets the foundation for its operations. The elements of the charter lay the groundwork for carrying out all audit committee responsibilities. For example, an audit committee’s charter may be drafted to accomplish the following key tasks.

• Set forth the audit committee’s purpose and list its specific responsibilities in detail.
• Establish the audit committee’s authority to carry out specific responsibilities, such as appointing and compensating an external auditor, obtaining information and meeting with officers of the organization.
• Define the composition of the audit committee, how members will be appointed and any requirements for expertise among the members.
• Describe how the audit committee will conduct meetings, how often it will meet, who must attend meetings and the circumstances under which the audit committee will meet in executive session.

The precise composition of an audit committee depends on the type of organization the committee serves. For example, publicly traded companies in the United States must comply with the rules of the U.S. Securities and Exchange Commission, Statement on Role of Audit Committees in Financial Reporting and Key Reminders Regarding Oversight Responsibilities

There should be written terms of reference which clearly spell out the authority and duties of the Audit Committee. The Board should disclose in the company's annual report the names of the members of the AC and the key terms of reference of the AC, explaining its role and the authority delegated to it by the Board.

The AC should have explicit authority to investigate any matter within its terms of reference, full access to and co-operation by Management, full discretion to invite any director or executive officer to attend its meetings, and reasonable resources to enable it to discharge its functions.

In respect of appointments and re-appointments of external auditors, the AC should evaluate the performance of the external auditor, taking into consideration the Audit Quality Indicators Disclosure Framework published by the Accounting and Corporate Regulatory Authority (ACRA).

The AC should make recommendations to the Board on establishing an adequate, effective and independent internal audit function. For the avoidance of doubt, the internal audit function can be in-house, outsourced to a reputable accounting/auditing firm or corporation, or performed by a major shareholder, holding company or controlling enterprise with an internal audit staff.

The AC should ensure that the internal audit function is adequately resourced and staffed with persons with the relevant qualifications and experience. The AC should also ensure that the internal auditors comply with the standards set by nationally or internationally recognised professional bodies.

The AC should report to the Board how it has discharged its responsibilities and whether it was able to discharge its duties independently. The activities the ACs should report to the Board include:

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