How to Develop an Effective Audit and Compliance Committee

An audit and compliance committee plays a critical role in ensuring strong, ethical corporate governance. Having an effective audit and compliance committee in place is especially important in today’s business climate, where a corporation’s financial performance and ethical conduct are being scrutinized more closely than ever before.

These days the most effective committees do more than simply monitor compliance efforts. They also take the initiative for finding ways to enhance the quality of corporate governance within the organizations they serve. Consequently, the approach an organization takes to establishing, implementing, and evaluating its audit and compliance committee requires careful consideration.

Establishing a charter

When developing an auditing and compliance committee, the organization’s board of directors should begin by creating a charter that outlines the responsibilities and guides the actions of the committee members. Key charter elements should include, but are not limited to:

  • Description of the purpose and specific duties and responsibilities of the committee
  • Overview of the committee’s monitoring functions
  • Committee membership requirements
  • Specific description of the committee chairman’s role and responsibilities
  • Committee secretary appointment process
  • Requirements for reporting to the board of directors
  • Delineation of the committee’s authority as it relates to obtaining information from management and consulting with auditors
  • Frequency of committee meetings
  • Number of committee members
  • Clarification of the committee’s authority to obtain independent advice
  • Committee performance evaluation process

Effective committees require strong leadership

In most organizations, the board of directors is charged with the responsibility of selecting the members of the audit committee and appointing a chairperson. In addition to driving the agenda for committee meetings and ensuring that all relevant issues are discussed, the chair should also spend time between meetings keeping abreast of market conditions that could impact the organization, as well as maintain communication with the CEO, board members, the compliance officer, general counsel, and the organization’s internal auditors (and external auditors if applicable). Additionally, the chair should have a role in the selection of audit and compliance committee members.

Committee composition

In order to avoid any potential conflicts of interest, an audit and compliance committee must be an independent entity, both in fact and appearance. Its membership should be comprised of non-executive directors, and should not include any current board members. When evaluating prospective committee members, ideal qualifications to look for include:

  • Extensive business experience
  • Strong understanding of risk management identification and assessment
  • Familiarity with all relevant financial reporting and accounting standards
  • Understanding of compliance systems
  • Familiarity with basic auditing concepts

Competent audit and compliance committee members also possess a number of important personal qualities. They should have a proven ability to think and act independently, and have the courage to make and stand by difficult, often unpopular, decisions. Strong committee members are not afraid to ask the tough questions and even “ruffle a few feathers” if necessary.

Most of all, committee members should be individuals of impeccable integrity who demand the highest standards of ethical behavior and place the interests of the organization’s shareholders and other stakeholders first and foremost.

Making recommendations to the board and management

It’s important to note that an audit and compliance committee acts in an advisory capacity only and has no authority to act on its own. Its role is to make recommendations to the board and management. Therefore, it is imperative that the committee provides the board with all the information it needs to make informed decisions that represent the best interests of the organization. All recommendations should include the reasoning behind them, as well as any relevant counterarguments and possible risks that board members should take into consideration.

Performance evaluation

The audit and compliance committee should undergo an annual evaluation to ensure it is continuing to serve the needs of the organization. This can be conducted as a self-evaluation with input provided by the board, top management, compliance officer, and auditors. Areas of evaluation should include:

  • Appropriateness and relevance of meeting agenda items
  • Assessment of the opportunity for committee members to influence agenda content
  • Honest assessment of meeting productiveness
  • Opportunities to improve committee performance
  • Effectiveness of board communication processes and protocols

The review findings should be submitted to the board of directors for discussion. When reviewing the findings, the board should consider whether the committee has been able to demonstrate its ability to fulfill its responsibilities as outlined in the charter.

To view an example of a well-crafted audit and compliance committee charter, click here.

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