Company Secretaries Interest Group (CSIG)


Audit Committees

In the past Audit Committees only focused on financial and treasury matters.

Policies and Procedures

Audit Committees are advised to be flexible in their terms of reference to enable them to deal adequately with policies and procedures.

Flexibility

The circumstances of every company are different and it is therefore necessary for Audit Committees, with a great deal of flexibility, to respond to problems and to identify trends without necessarily adopting a fixed course of action.

Duties of Audit Committee members

Firstly, the two basic duties of Audit Committee members are care and loyalty.

Membership - Qualification

The need for greater independence, particularly when companies are listed, is emphasised.
The members should be suitably qualified. It is recommended that at least one of the members have a financial qualification or experience in the financial sector. It is important for the members to have an understanding of the business, integrity, dedication and independent judgment and to add value.

Size of the Committee

It is recommended that the audit committee is large enough to balance experience and views however, small enough to operate efficiently. A committee comprising of approximately six members should be effective.

Members

  • The director and/or the head of the Internal Audit function
  • External auditors
  • Senior management
  • Chief financial officer (CFO)

Responsibilities

It is the responsibility of the Committee to review:

  • accounting and reporting issues
  • impact on financial statements
  • specific business operations
  • financial risks and concerns
  • reflection of appropriate accounting principles
  • sections of the annual report
  • external results of the external audit
  • make recommendations to the Board

Number of meetings

It is recommended that the Committee meet on a regular basis. A number of companies have adopted the recommended practice to meet on a monthly basis.

Accountability

The NASDAQ Report is now suggesting that the Audit Committee should regularly meet with the Chief Executive Officer, Chief Financial and Chief Accounting officer, not only to discuss accountability and reporting issues but also to assess the quality and effectiveness of these Officers.

Questions to be asked

  • What policies and risks concern you?
  • What are your contingency plans?

The NASDAQ Report emphasises the need for external Auditors to be accountable to the Board of Directors through the Audit Committee and not directly through management.

Charter

It is recommended that the Audit Committee Charter (a written terms of reference) should be a document that empowers the Committee with the authority to develop and change its own policies an procedures from time to time, to address the Company's specific business operations, financial risks and concerns.

The following should be included in the Charter however, could be tailored to suit the needs of the company:

  • Objectives
  • Membership
  • Roles and responsibilities
  • Authority
  • Meetings

Meetings

As mentioned above, meetings should be held on a regular basis to provide the opportunity to review not just the financial position of a company but also risk, policies and procedures.

Agenda

An agenda should be prepared and approved by the Chairman prior to submission of documentation. The documentation should be distributed to the members well in advance to give them the opportunity to review and assess the information provided.

New Members

New members should be provided with background information namely, the Company, Internal Auditors and External Auditors.

Governmental and Quasi-Governmental Organisations

The GG23246 dated 18 March 2002 contains the Draft Treasury Regulations, issued in terms of the Public Finance Management Act 1999, which will be mandatory for governmental and quasi-governmental organisations (some of which are also companies) upon adoption.

The emphasis on risk management and “operational” risk, in addition to the “financial” risk and the review of legal and regulatory compliance is noteworthy.

The term “accounting authority” usually means the Board of Directors or Council

Provisions of section 27 include:

  • The Chairperson of the audit committee may not be the Chairperson of the accounting authority (Board) or a person who fulfils an executive function.
  • The relevant executive authority has to concur with any premature termination of services of a member of the audit committee.
  • The audit committee must review the following:
    • Effectiveness of the internal control system;
    • Effectiveness of the internal audit function;
    • Risk areas to be covered by internal and external audit;
    • Reliability and accuracy of all financial information;
    • Any accounting and audit concerns identified by internal and external audit;
    • Compliance with the legal and regulatory provisions
  • The Audit Committee to:
    • have explicit authority to investigate matters under its powers;
    • be provided with the necessary resources.
  • The Audit Committee shall:
    • report and make recommendations to the accounting authority;
    • report (in the annual report) on the effectiveness of internal controls;
    • report (in the annual report) on the evaluation of the financial statements;
  • Upon discovery of any person on the Board being implicated in fraud, corruption or gross negligence, the Chairperson of the audit committee shall report to:
    • The relevant executive authority;
    • The Auditor General

Amongst the provisions of section 27.2, which deals with internal controls and internal audit, are the following:

  • The accounting authority (the Board) must arrange an annual risk assessment to identify emerging risks.
  • A risk management strategy to determine the skills to manage the risk and to direct internal audit shall be implemented.
  • An internal audit unit shall be established.
  • Internal audit shall follow the standards set by the Institute of Internal Auditors.
  • The internal audit unit shall prepare:
    • A three year strategic internal audit plan;
    • An internal audit plan for the first year of the plan; detailed plans for each part of the internal audit plan ;
    • A modus operandi to guide the audit relationship;
    • Reports to the audit committee on performance of the audit and interventions that may be necessary.
  • Internal controls should be evaluated by internal audit in the following areas:
    • operations
    • information systems
    • reliability of financial and operational reports
    • safeguarding of assets
    • compliance with laws, regulations and controls
  • Internal audit must assist the accounting authority (Board or Council) by evaluating the process to ensure:
    • corporate values are preserved;
    • accountability;
    • objectives are reached;
    • objectives and values are established and communicated.

 

 

 


 

 

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