What Is an Audit Committee?
Let me explain what an audit committee is: it's one of the main operating committees on a company's board of directors, and it's responsible for overseeing financial reporting and disclosure.
If you're dealing with U.S. publicly-traded companies, you need to know they must maintain a qualified audit committee to be listed on a stock exchange. The members have to be independent outside directors, and at least one must qualify as a financial expert.
Key Takeaways
- An audit committee consists of board of directors members who oversee financial statements and reporting.
- Regulations require the committee to include outside board members and those experienced in finance or accounting to ensure honest and accurate reports.
- Committee members must approve the company's books and accept responsibility for any misreporting.
How an Audit Committee Works
The audit committee collaborates closely with auditors to make sure the company's books are accurate and that there are no conflicts of interest with auditors or any outside consulting firms the company hires. Ideally, the chair should be a Certified Public Accountant (CPA), but that's not always possible—even on the board itself.
The New York Stock Exchange requires a financial expert on the committee, though this is often filled by someone like a retired banker, whose fraud-detection skills might not be top-notch. You should note that the committee needs to meet at least four times a year to review the latest audit, either in person or via teleconference, with extra meetings for any pressing issues.
The committee keeps in touch with the company's chief financial officer (CFO) and controller. It has the power to start special investigations if accounting practices seem off or if serious employee issues come up, and an internal auditor would help with that.
Its role covers overseeing financial reporting, monitoring accounting policies, handling external auditors, ensuring regulatory compliance, and discussing risk management with management. You can find the details on duties and composition in the company's SEC Form DEF 14A, or proxy statement.
Members might change over time as people join or leave the board or switch committees. Besides regular director pay, audit committee members get extra compensation for each meeting they attend, just like other committees.
Audit Committee Hazards
You have to understand that the audit committee must take its responsibilities seriously. Financial reporting, compliance, and risk management face many hazards, particularly in large organizations with thousands of employees and global reporting systems.
External threats like cyber hacking fall under the committee's oversight, which makes the job even tougher. Cybersecurity needs to be a growing priority for audit committees in boardrooms everywhere.
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