Composition and Qualification Requirements
Discuss About The Audit Independence Committee Characteristics.
Corporate governance is referred to a system of processes, regulations and practices based on which a company is directed and controlled. It focuses on balancing the interest of different stakeholders of a corporation such as employees, shareholders, customers, financiers, government, suppliers, management and community[1]. It intended to increase the accountability of a company which assist in avoiding major business crisis before their occurrence. The significance of corporate governance has increased substantially especially with the continuous worldwide financial crises. The audit committee is referred to a central pillar of effective corporate governance in companies. It offers management an effective oversight of the performance of the corporation based on independence and objectivity of the auditors and the overall quality of the audit[2]. The aim of this report is to evaluate the role and responsibility of an audit committee in the corporate governance. This report will focus on analysing the composition and qualification requirement of members of an audit committee and examine their duties. This report will discuss the significance of independence and disclosure requirements in audit committee and evaluate the auditing standards which are required to follow by auditors. Furthermore, the relationship of the board with the audit committee will be evaluated along with the auditors’ role in the public interest.
According to the Auditing and Assurance Standards Board (AUASB), the audit members should have a balance of technical experience, professional skills and knowledge along with independence, objectivity and sufficient capacity to discharge the audit committee’s obligations and responsibilities as provided in the charter[3]. Section 4.1 provides the provisions regarding the structure of the audit committee. The CEO or the managing director should not be a part of or the member of the audit committee, although it is normal that the CEO is invited to the meetings of the audit committee[4]. The board has the right to appoint an independent person who is not appointed as the director to provide particular expertise regarding the audit committee. Following qualities are the key qualification for audit members in the audit committee:
- An independent mind-set
- Understanding of the industry, business, product/services and the entity
- Strong communication skills
- High level of integrity and ethics
- Sufficient time for executing responsibilities
- Financial literacy to read and understand financial accounts and statement
- One or more than one members that have the expertise in finance field and experience which they collected by being an accountant or other financial experts of any other profession relating to finance and accounting[5].
- A mix of experience and skills which are required for discharging responsibilities which include risk management, international commercial background, experience in business and financial and legal compliance
The audit committee comprised of board members who include independent or non-executive directors, economics, the board can hire an external member, and they may be a former board member[6]. The board is responsible for appointing audit committee’s members, and the board should create a committee for interviewing candidates who pose appropriate skills and experience which is required for being an audited member. The size of an audit committee should be large enough which ensure that balancing of views and experience and small enough to operate efficiently. It is recommended by AUASB that majority of audit members should be independent and non-executive. Following relationships affects the independent status of the audit members:
- A substantial shareholder
- Employee
- Professional advisor of the company in past three years
- A material supplier in past three years
- Who is in a contractual relationship with the company
- Has close family ties with people described in above category
- Has been a director of the corporation
Duties of the Auditors
- Has strong leadership qualities
- Has proper knowledge of responsibilities and duties of their position
- Has proper skills and knowledge of the industry
- Has strong communication skills
Following are the duties which are required to be followed by each audit member:
- Identifying and assessing the misstatements in the financial report which are occurred due to fraud or error and collecting appropriate evidence which is required for providing the auditor’s opinion[7].
- Obtaining a proper understanding of internal control for designing audit procedures which are appropriate for the circumstances.
- Evaluating accounting policies’ appropriateness which is used and reasonableness of the related disclosures.
- Evaluating whether any material uncertainty exists which can create doubt on the continuing ability of the company. If material uncertainty exists, then drawing attention towards it by making related disclosures in the audit report[8].
- Evaluation of overall structure, content and presentation of the financial report which also include disclosures.
- Obtaining and collecting sufficient evidence which is enough for expressing an opinion of the group financial report. The auditor is also required to managing, direct, supervise and perform the group audit, and he/she remains solely responsible for the audit opinion.
The independence of audit committee is required because it assists auditors in carrying out their work in a free and objective manner. The independence is needed so that the auditor opinion is free from any outside influence which can be caused by any relationship between auditor and other people related to the company[9]. An audit committee is required to give an unbiased an honest, professional opinion which can be negatively affected in case the audit committee members are not independent. Doubt can be created on the authenticity of financial reports unless suitable corporate governance measures are not taken by a firm for ensuring the independence of audit committee based on which shareholders cannot rely on their opinion. A good example is Enron and their relationship with auditors Arthur Andersen who received $27 million for non-audit and $25 million for audit services. It resulted in the demise of Enron because the accounting firm was found guilty of not acting independently.
It is responsible for reviewing the firm’s performance and independence and made necessary disclosures to the board. It is required to made disclosures regarding audit plans, capability and expertise of handling complex tasks, knowledge of the industry, extern data, appropriateness of fees, quality of communications, independence and objectivity and tenure of the firm[10]. According to Australian Securities Exchange (ASX), the audit committee has to comply with continuous disclosure obligations based on which it has to make disclosures regarding market changes. They also have to make necessary disclosures as soon as they become aware of information which might concern a reasonable person. Furthermore, disclosures regarding composition, performance, audit partners’ name, committee’s policies, audit fees, each significant engagement, and effectiveness of internal audit are required to be made by the audit committee.
The audit committee has to comply with the provision given under the Audit Act 1994 regarding the financial reporting for ensuring that they comply with the Auditing Standards provided by AUASB. Compliance with the Auditing Standards and providing explanatory guidance for external auditor are the mandatory requirements of the audit committee which include provisions such as communicate material weaknesses, terms of the audit engagement, seek representations for management, communicate matters for governance interest, and terms of the audit engagement[11]. One of the key roles of the audit committee is to establish a positive relationship with the external auditor. Australian National Audit Office (ANON) provides auditing standards which are required to be followed by the audit committee of a company. Following are some of the Auditing Standards which are required to comply by the audit committee:
- ASAE 3000: Audit committee ensures that engagement has to be there in other functions of earlier monitory records
- ASAE 3100: Compliance Engagements
- ASAE 3500: Performance Engagements
Need for Independence of Audit Committee
While monitoring risk management and compliances, following auditing standards are required to be followed by the audit committee:
- AS 8000-2003: Corporate Governance: Proper compliance with good governance principles
- AS 8001-2008: Controlling of activities relating to fraud and corruption control
- AS 8002-2003: Establishing, managing and implementing of effective organisational code of conduct
- AS 8003-2003: CSR or Corporate social responsibility
Both the board of directors and the audit committee focuses on issues which are relevant for ensuring the authenticity and integrity of the financial report of the corporations. As per the ASX Listing Rules, it is mandatory for certain listing enterprises for establishing an audit committee. Other corporations chose whether to establish or not establish based on their requirements an audit committee however its establishment did not eliminate or alter the board members’ obligations and duties regarding the financial reports[12]. The audit committee has a significant impact on the process of financial reporting and it assists auditors in improving the quality of audit. The Corporations Act 2001 provides responsibility of the committee and board members to ensure that independence of auditors during appointment and on an on-going basis[13]. Moreover, the relationship plays a crucial role while assessing the fees of the company’s auditor. Their relationship also important while ensuring and promoting the audit quality which is affected by a number of factors such as recommending and appointing the company’s auditors, communicating with auditors, facilitating the audit process, maintaining independence and assessing the audit quality.
There are a number of regulations required to be followed by the auditor of a company in order to ensure that he/she gives an independent and true opinion regarding the financial statement of the corporation. Registered Company Auditors (RCAs) are authorised to carry out the audit of an organisation as per the Corporation Act 2001. While performing their duties, the auditor is required to comply with the Australian Auditing Standards. These standards establish requirements and provide application regarding the responsibilities of the auditor while analysing the financial reports of the company[14]. Furthermore, the standards provide provisions regarding the form and content of the auditor’s report. The Auditing Standards are provided in the Corporations Act 2001 under section 336. Furthermore, regulations regarding tenures, rotation, licensing, qualification and minimum competency requirements are also given in Corporations Act 2001 under section 1280.
It is necessary that the auditor act in public interest which means focusing on fulfilling the interest of stakeholders of the corporation. The independent report and opinion gave by the auditor assist people in effectively understanding the performance of the corporation based on which they can take financing decisions[15]. Furthermore, the advice given by the audit committee assists the board in finding the discrepancies in the company’s operations and developing strategies based on such information in order to promote the growth of the corporation. The auditor protects the interest of investment through reliable, high quality and independent auditing and assists the board in finding issues in the enterprise which result in sustaining the corporation’s growth and protecting the public interest.
Disclosure requirements of Audit Committee
Conclusion
In conclusion, the audit committee has many roles and responsibilities which assist in ensuring the independent nature of their process which provides correct information to the board and shareholders of the firm. The audit company include people who are not linked or in a relationship with the corporation because they are responsible for providing their unbiased and honest opinion regarding the operations and performance of the company, therefore, audit committee independence is a crucial factor. The audit members have to make a number of disclosures to the board and shareholders of the corporation regarding the effectiveness of its operations and overall performance. There is a strong relationship between the board and the audit committee because both of them focus on promoting the growth of the organisation. The auditor has to follow a number of regulations as provided by the Corporations Act 2001 to ensure that their independence is maintained they and provided an unbiased and honest audit opinion regarding the financial reports. The establishment of an audit committee and independence of auditors is beneficial for the interest of the public because it reduces corporate frauds and sustains the growth of local communities.
References
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Audit Quality – The Role Of Directors And Audit Committees | ASIC – Australian Securities And Investments Commission (2018) Asic.gov.au <https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/audit-quality-the-role-of-directors-and-audit-committees/>
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Beekes, W, Philip Brown and Qiyu Zhang, “Corporate Governance And The Informativeness Of Disclosures In Australia: A Re-Examination” (2014) 55(4) Accounting & Finance
DeZoort, FT and Mark H. Taylor, “COMMENTARY––A Public Interest View Of Auditor Independence: Moving Toward Auditor Reliability When Considering And Promoting Audit Quality” (2015) 15(1) Accounting and the Public Interest
Firmansa, E, Adam Zakaria and Marsellisa Nindito, “The Influence Of Characteristics Of The Board Of Commissioners, Audit Committee Meetings And Auditor Type On Intellectual Capital Disclosure” (2018) 5(1) Pressacademia
Hansye, YK, “The Audit Committee: A Gatekeeper For Effective Corporate Governance” [2012] SSRN Electronic Journal
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