In our previous posts, we discussed the role of the Executive in shaping governance structures and the importance of a prioritised implementation plan. Now, let’s delve into the process of preparing for a new Audit Committee.
Preparing for a New Audit Committee
The establishment of an Audit Committee is a significant step in enhancing a company’s governance structure. However, before the committee can be set up, there are several preparatory steps that need to be taken.
- Creating the Terms of Reference: The Terms of Reference is a document that outlines the purpose, structure, and responsibilities of the Audit Committee. It serves as a guide for the committee’s operations and helps ensure that all members understand their roles. If major financial or audit issues arise this is the document that regulators, lawyers, the Board, members of the Audit Committee, stakeholders, etc. will look at first to determine who should have done what, when and how.
- Identifying Suitable Members: The effectiveness of an Audit Committee largely depends on the competence and integrity of its members. Therefore, it’s crucial to identify individuals who have the necessary skills, experience, and independence to serve on the committee.
- Induction Course: Once the members have been identified, they should be provided with a structured induction course to help them be best prepared to perform their roles effectively. This could include an introduction to the complexities of the company's business, focused relevant training on financial reporting, risk management, confidential communications and corporate governance.
- Setting Up Meeting Structures: Regular meetings are essential for the Audit Committee to carry out its responsibilities. Therefore, a meeting structure should be set up, including the frequency of meetings, the preparation of agendas, and the process for recording minutes.
Establishing the Audit Committee
The process of establishing an Audit Committee involves several key steps:
- Approving the Terms of Reference: The first step is for the Board to approve the Terms of Reference that was created during the preparation stage. This document will guide the operations of the Audit Committee.
- Appointing the Members: Next, the Board needs to formally appoint the members of the Audit Committee. As discussed in our previous post, the majority of these members should be independent non-executive directors.
- Conducting the First Meeting: Once the members have been appointed, the Audit Committee should conduct its first meeting. This meeting is an opportunity to review the Terms of Reference, discuss the committee’s responsibilities, and plan for future meetings.
Key Responsibilities of the Audit Committee
The Audit Committee has several key responsibilities:
- Internal Audit: The Audit Committee works very closely with the Internal Auditor. It agrees his/her multi-annual work plan, ad hoc investigations, ensures resources are adequate, receives regular verbal and written reports and agrees follow up actions where concerns have been identified.
- Overseeing Financial Reporting: The Audit Committee is responsible for overseeing the company’s financial reporting process to ensure accuracy and transparency.
- Reviewing Internal Controls: The Audit Committee needs to review the company’s internal control systems and recommend improvements where necessary.
- Managing Risk: The Audit Committee plays a crucial role in the company’s risk management. It needs to ensure that risks are properly identified, assessed, and managed.
- Liaising with Auditors: The Audit Committee is the main point of contact for both internal and external auditors. It needs to ensure that the auditors are independent and have access to all necessary information.
Establishing an Audit Committee is a significant step towards enhancing corporate governance. By carefully following the steps outlined above, you can ensure that your Audit Committee is set up for success.
In our next post, we will delve into the role of the Internal Audit function and its importance in supporting the Audit Committee. Stay tuned! Please keep sending your questions by DM.
