Ingredients of an effective audit committee

The audit committee is a fundamental part of the corporate governance structure. But with changing demands being placed on it, what steps can companies take to ensure that the committee effectively safeguards stakeholders?

A popular panel at the 2014 World Congress of Accountants in Rome explored the issue. Here are some of the ingredients that make up an effective modern audit committee.

Blend of skills

To meet the changing demands placed on them, audit committees require a diverse mix of skills. Ensuring that members have sufficient financial literacy is the chair’s responsibility, according to Lee White, the CEO of Chartered Accountants Australia and New Zealand. White said there should be at least one ex-auditor on the committee.

Environmental, social, and corporate governance activities require a much broader range of expertise. All of the roles on the committee require a far greater depth of knowledge of technology and how that affects the business than they might have a few years ago. In this context, members might have to take far more regular education to keep up, said Anne Molyneux, a representative of the International Corporate Governance Network.

Molyneux said committees should be granted access to external experts where necessary, for example, for risk oversight. White supported this, noting that unless there is sufficient balance [of expertise] in the audit committee, the significant future risks to the business will not be picked up. He recommended that committees keep focus on this forward-looking piece.

Communication

As communication is integral to the success of the committee, the chair has to have outstanding communication skills to effectively engage members of other committees, the board, the CEO, and internal and external auditors, White added.

A close working relationship and understanding between the internal auditor and audit committee chair is fundamental, said Anton van Wyk, global chairman of the Institute of Internal Auditors in South Africa, adding that there is currently not enough communication between the two. Van Wyk suggested that immediately after each audit committee session, the chair should brief the head of internal audit to help IA understand issues and re-address its approach for the following year.

Independence

For Molyneux, the independence of the committee is fundamental. Molyneux highlighted the need for a robust definition of what being independent means, adding that committees should have more than one member who is truly independent of the company.

Remuneration

Panelists acknowledged that if the pay offered to committee members is too high, members cannot be truly independent, but if remuneration is too low, it will prove difficult to attract candidates.

Molyneux noted that the expanded role of the committee means that members are now expected to dedicate more than the previous standard of 35 days per year. She suggested that “reasonable recompense” would take into account the value of the candidate’s skills, the amount of time he or she is committing, as well as his or her own personal risk in participating.

Auditor Michele Casò of Milan audit practice Studio Casò concluded that audit committees not only need to be truly skilled and independent, but also must have the power to use that independence and skill to do their job and exert influence within the company.

—Samantha White (swhite@aicpa.org) is a JofA senior editor.