All large companies are required to establish an Audit Committee. A large company, inclusive of its subsidiaries, is defined as meeting both of the following criteria:-
- Having fixed and current assets exceeding €25m, and
- A turnover of in excess of €50m.
Members of the Audit CommitteeIn order to ensure the Audit Committee is effective, its’ members should have the followings skills:-
- Competent and knowledgeable in financial matters;
- Technical know-how to communicate effectively with the external auditors and understand changes in accounting regulations, company law and other regulations that impact on the entity;
- Challenge management in a positive manner and gain support of Board to implement required changes;
- The Act requires that at least one member is a non-executive director and independent of the Board.
- Identifying the risk areas within the entity and assessing the potential effect of fraud/error in that area on the entity;
- Identifying risks that prevent the entity from achieving its objectives;
- Monitor the effectiveness of internal control systems and internal risk management;
- Monitor the financial reporting process to ensure that information is properly captured and communicated in an effective manner to enable its personnel carry out their responsibilities;
- Monitor the statutory audit of the financial statements and the appointment and independence of the statutory auditors;
- Review and approve the internal auditors plan;
- Review and discuss with the internal auditors their reports and findings and follow-up processes.
Benefits of having an effective Audit CommitteeIn recent years, we have seen a number of high profile cases in the newspapers and indeed the Courts of weak controls in organisations leading to improper practice, mis-reporting of financial information, undetected fraud and abuses of authority. The effects of these is high both on the organisations involved, their shareholders, creditors and employees in addition to the reputational damage caused. If an effective and properly empowered Audit Committee is in place, the benefits are:
- Improved understanding by the Board of the quality of the entity’s controls and accounting function and the risk areas affecting the entity;
- Increased emphasis throughout the organisation on importance of risk, controls and effective communication of financial information;
- Demonstrates the Board’s intention to exercise care in the presentation of financial information, both internally and externally;
- Enhances the non-executives’ knowledge and understanding of the organisation’s finances;
- Gives more independence from the Board over the entity’s internal control function;
- Improves the communication between the Board and external auditors;
- Creates a forum for management finance team to discuss areas of concern.