Audit Committee Role in Corporate Governance

What is Corporate Governance?

Corporate governance represents a system of rules, practices, and processes which dictate how companies should operate. Technically, corporate governance can be defined as “the system by which companies are directed and controlled in the interests of shareholders and other stakeholders”. The control and direction may come from within the company or from outside.

Corporate governance provides a framework for achieving a company’s objectives. The purpose of corporate governance is to define a system that promotes transparency within a company. Similarly, it exists to provide security for a company’s shareholders. Corporate governance became relevant due to various high-profile company failures in the past.

Corporate governance also defines various committees that companies must have. One of these includes the audit committee that is essential for all companies.

What is the Audit Committee?

The audit committee is a committee that exists on a company’s board of directors. It consists of independent non-executive directors. The primary function of the committee in a company is to provide evidence of increased accountability to shareholders. This committee is in charge of overseeing financial reporting and related disclosures.

For most publicly-traded companies, having an audit committee is mandatory. For private companies, the audit committee must have at least one non-executive director. Public companies must have at least three independent non-executive directors. In either case, at least one director on the committee must have recent financial experience or qualify as a financial expert.

The audit committee also coordinates with a company’s auditors. Overall, the committee must include only independent directors. In case any of the non-executive directors on the committee cannot demonstrate independence, they cannot stay on it. The role of the audit committee in corporate governance is crucial for companies.

What is the role of the Audit Committee in Corporate Governance?

The audit committee in a company usually overlooks the financial matters. It includes any issues related to financial statements and auditing. During this, the audit committee plays a significant role in a company’s corporate governance.  Some of the primary functions that the audit committee performs in corporate governance include the following.

The audit committee in a company evaluates critical issues and judgments that a company’s management makes during financial reporting. It also reviews the effects of any accounting policies on a company’s financial statements.

The audit committee also ascertains that the company has appropriate policies and processes to identify or prevent fraud. Some regulations may require the audit committee to oversee the internal auditing function in a company.

The committee also appoints, oversees, and compensates the independent auditor for a company. Overall, it acts as a liaison between a company’s management and independent auditors. They also meet with both parties to discuss the audited financial statements. The committee also reviews non-financial information to ensure it relates to financial reports.

Most companies also have a risk committee that overlooks a company’s risk management process. In its absence, the audit committee also assumes the responsibility for risk management. Therefore, in some companies, it may be the audit and risk committee.

Overall, the audit committee overlooks and controls a company’s financial matters. Apart from the above roles, the audit committee can also look at compliance and regulation matters. Similarly, the audit committee may also perform several other finance-related duties in a company.

Conclusion

Corporate governance is a system of management through which companies are directed and controlled. Audit committees play a significant role in corporate governance. Usually, a company’s audit committee overlooks financial and audit matters. Similarly, it may also handle risk and compliance issues. Having an audit committee is mandatory for publicly-listed companies.

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