Corporate governance is a system of practices, rules, and processes by which companies are directed and controlled. It provides a framework for companies to achieve their objectives. Corporate governance defines several rules and practices that help companies run effectively and efficiently. Among these, corporate governance requires companies to establish several committees, including the audit committee.
What is the Audit Committee?
The audit committee is a body that overlooks a company’s external and internal audit functions. This committee is also responsible for ensuring the integrity of financial and narrative systems within a company. For most companies, having an audit committee is mandatory under corporate governance requirements. Other companies can also voluntarily establish an audit committee.
The audit committee reports directly to the board of directors. This committee includes independent non-executive directors, one of whom has a financial background. The duties and responsibilities of the committee may differ from one company to another. In some cases, this committee may also be in charge of risk management if a risk management committee doesn’t exist.
What are the Audit Committee Terms of Reference?
The audit committee terms of reference define the purpose or structure of the committee. Usually, it is a written document that helps set an audit committee’s objectives, responsibilities, and other fundamental aspects. The audit committee terms of reference serve as a policy manual for the audit committee.
The audit committee’s terms of reference will differ from one company to another. Companies may add specific portions to it or remove some others. Nonetheless, most terms of reference documents will cover some crucial areas. These include the objective of the committee, its responsibilities, its constitution, its authority, secretarial and meeting duties, the review process, reporting procedures, etc.
Usually, most of the areas within the terms of reference will take guidance from corporate governance and best practices. However, companies can modify these terms to serve their purpose. However, any modifications to the terms of reference should be in line with the corporate governance requirements. Companies must also review the terms of reference regularly and make any amendments they deem necessary.
What are the Audit Committee Best Practices?
Best practices are procedures, rules, or processes that are accepted or prescribed as being most effective. These rules can help companies understand what the benchmark for audit committees is. Best practices may come from various sources. Some of these may arise from legislation, while others may relate to a specific industry.
Following the audit committee’s best practices is not mandatory for companies. However, if companies choose to adhere to these practices, they will improve the efficiency and effectiveness of their audit committees. The audit committee’s best practices merely define the standard process, rules, or procedures. Companies may also use these practices as guidance to setting up their audit committees.
Audit committee best practices may define various factors. These may include the audit committee’s work plan, meeting requirements, communication practices, corporate governance practices, etc. Similarly, the best practices may vary from one place to another. However, they usually cover the same areas and have similar practices.
The audit committee is a committee that companies must set up due to corporate governance requirements. This committee usually handles a company’s internal and external audit, financial reporting, and risk management functions. The audit committee terms of reference is a document that defines various aspects of the committee’s work. The audit committee’s best practices are practices that are accepted or prescribed as being most effective.