The Role of an Audit Committee

January 20, 2011

The audit committee should be responsible for multiple levels of people who act as checks and balances. Making sure the Audit Committee is operating effectively is a management priority. Define the Audit Committee's roles and responsibilities and how it interacts with the Board of Directors.

In recent years, attention has turned to the role of the Audit Committee. The Audit Committee is a critical oversight mechanism in good and difficult times. To be successful, each of its members must devote the necessary time, educate themselves, be demanding, diligent and insist on timely and appropriate information and responses from management, internal and external auditors.  

The most recent report of the National Association of Corporate Directors' Blue Ribbon Commission offers practical perspectives, suggestions and practices on what makes an Audit Committee effective. The report identifies key issues and practical suggestions to maximize proactive engagement, transparency and effective shareholder communications. In light of complex accounting rules and regulations, innovative financial instruments and the global nature of businesses today, the Audit Committee report should address the following:

    * The Audit Committee's responsibilities and membership requirements
    * Who should lead and serve on Audit Committees
    * Oversight of financial reporting and risk
    * Setting expectations for external and internal auditors
    * Setting the agenda and making the most of Audit Committee meetings

Key suggestions:

    * Focus the agenda on high priority issues. Provide the agenda in advance and engage in discussion rather than listening to presentations.
    * Information from management and internal and external auditors is essential. Questions should explore satisfaction with management, auditor competency and concerns about financial-reporting and control issues.
    * Address the assumptions which are the basis for accounting decisions, estimates and issues related to financial reporting. Understand the Audit Committee's role in the oversight of risk management.
    * External and internal auditors must be sensitive to the priority of risk and the internal audit plan should focus on critical risks to the business, not limited to compliance and financial risks.
    * Make sure the Chief Financial Officer and staff, together with internal audit, have the necessary resources to succeed.
    * Assess the tone at the top and throughout the organization, including the effectiveness of compliance and anti-fraud programs.
    * Monitor organizational change and risk management and the Audit Committee's role in overseeing risk, internal controls, compliance and the impact of significant change to the Company's financial performance. The Committee is in a unique position to help to alleviate the risk of misalignment.
    * Take a hard look at the Audit Committee's effectiveness-including its composition and leadership-and find ways to continually improve.
    * In the event that the entity is publicly owned, filings with governmental agencies, press releases and similar materials should be reviewed. 

A copy of the report is available on the NACD website. For additional information on this topic, consult your Perelson Weiner Partner.

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