Summary
The effectiveness of the internal audit function is derived from the effectiveness of the audit committee.
Where that committee is ineffective the internal audit function will wither and die.
Here I summarise what, in my opinion constitutes, the top ten characteristics of an effective audit committee.
This list is not intended to be exhaustive. However, it can be used as a starting point to establish an effective and respected audit committee that adds value to the business.
Analysis
I have set up a number of audit committees around the world, and have been directly involved with others. In my experience, and from my observations of companies, the effectiveness of the internal audit function is derived from the effectiveness of the audit committee.
I would now like to take this opportunity to remind those less proactive audit committees, and less supportive boards, as to what in my opinion constitutes the top ten characteristics of an effective audit committee:
1. The audit committee must be independent, members should not have previously held executive positions in the company for which they sit on the audit committee; eg the chairman of the audit committee should not have previously been the finance director.
6. The audit committee should have free and unfettered access to the internal auditors and external auditors of the company, as well as the board and management of that company.
7. The role and scope of the audit committee should be laid down in a charter, which should be signed by the board and distributed within the company.
8. The internal audit department should report directly to the audit committee. Dual reporting lines, to eg the Finance Director, do not work.
9. The audit committee should be responsible for assessing the quality and effectiveness of the internal audit department and external auditors. The committee should be able to make changes, as and when required, to the scope and providers of the audit (both internal and external) coverage.
10. The audit committee should be responsible for the budget of the internal and external audit coverage.
Where that committee is ineffective, the internal audit function will wither and die.
I have already written about the Attributes of a World Class Internal Audit Department and The Added Value of Internal Audit, a Brief Overview .
I would now like to take this opportunity to remind those less proactive audit committees, and less supportive boards, as to what in my opinion constitutes the top ten characteristics of an effective audit committee:
1. The audit committee must be independent, members should not have previously held executive positions in the company for which they sit on the audit committee; eg the chairman of the audit committee should not have previously been the finance director.
The company should not use the audit committee as a paid retirement home for previous directors. I have personally witnessed the elderly chairman of one audit committee dozing off during a committee meeting.
2. Members of the audit committee should be suitably qualified and experienced, at least one member should hold a relevant financial qualification; so that they can at least understand the intricacies of the company’s accounts.
3. The audit committee should present a report in the year end accounts, as to the quality and effectiveness of the internal controls and risk management process.
4. The audit committee should be prepared to take a stand against the board on matters of significance, and resign if the board does not take the appropriate corrective action.
5. The members of the audit committee should be up to the job, they should not hold an excessive number of other positions.
2. Members of the audit committee should be suitably qualified and experienced, at least one member should hold a relevant financial qualification; so that they can at least understand the intricacies of the company’s accounts.
3. The audit committee should present a report in the year end accounts, as to the quality and effectiveness of the internal controls and risk management process.
4. The audit committee should be prepared to take a stand against the board on matters of significance, and resign if the board does not take the appropriate corrective action.
5. The members of the audit committee should be up to the job, they should not hold an excessive number of other positions.
6. The audit committee should have free and unfettered access to the internal auditors and external auditors of the company, as well as the board and management of that company.
7. The role and scope of the audit committee should be laid down in a charter, which should be signed by the board and distributed within the company.
8. The internal audit department should report directly to the audit committee. Dual reporting lines, to eg the Finance Director, do not work.
9. The audit committee should be responsible for assessing the quality and effectiveness of the internal audit department and external auditors. The committee should be able to make changes, as and when required, to the scope and providers of the audit (both internal and external) coverage.
10. The audit committee should be responsible for the budget of the internal and external audit coverage.
I have personally witnessed a situation where neither the board nor the audit committee held the budget; needless to say this did not work.
This list is not intended to be exhaustive. However, it can be used as a starting point to establish an effective and respected audit committee that adds value to the business.
This list is not intended to be exhaustive. However, it can be used as a starting point to establish an effective and respected audit committee that adds value to the business.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
