1. The Securities and Exchange
Commission (SEC) requires all listed
companies to have an audit committee
(or equivalent) as part of its Board of
Directors. Highly effective audit
committees are comprised of
“independent” members with at least
one financial expert.
Audit committees are designed to
improve the financial accountability
and oversight of the organization.
They oversee the audit process,
internal control over financial reporting
and compliance with laws and
regulations. While not required for
privately held companies, many
private companies and not-for-profit
organizations have audit committees in
place.
Why establish an audit commit-
tee? There are numerous reasons.
Most importantly, they can offer an
independent and external perspective
to your financial reporting and internal
control structure. Many audit
committees are comprised of senior
corporate executives who bring a
wealth of knowledge and experience .
They can bring new ideas to the Board
and offer a critical and questioning eye
to
evaluate risks facing the company. This
independent perspective can be
invaluable if a company is facing
challenges or is considering new
markets or opportunities.
Audit committees assess the company’s
risk assessment and risk management
policies and help mitigate business
risks. In today’s IT dependent society,
enterprise risk management and IT
security issues have become top of
mind issues to many audit committees.
Additional benefits of an audit
committee include improvement of
internal controls and more efficient
internal processes. The “financial
If an organization has an internal audit
department, the committee should review
and approve the audit plan, discuss
staffing complement and concerns or
issues raised by the department. Each
audit committee should have a charter that
establishes the purpose, responsibilities,
and authority of the committee and the
charter should be tailored to the company.
If you are looking to establish an audit
committee or improve your committee’s
effectiveness, you should contact your
accountancy firm for assistance.
Gordon S. MacLean, CPA
Gordon is a Partner and the Director of
Audit Services at RJI. He has 30 years of
experience, including 20 years at a Big 4
firm. He has been involved in numerous
capital raising transactions, including SEC
public offerings and filings, initial public
offerings, secondary offerings, spin-off
transactions, public debt offerings, and
private placements. He has worked with
various boards and audit committees
during his career. Gordon MacLean can
be reached at gmaclean@rjicpas.com or
(949)852-1600
RJI
Established in 1980, RJI specializes in
audit, accounting, corporate and
international tax issues for publicly traded
and privately held companies. RJI is
PCAOB registered and the Southern
California member firm of DFK
International, a top 10 international
association of independent accounting
firms and business advisers. For more
WHO IS WATCHING OVER YOUR FINANCES?
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expert” can add significant value for
companies looking to raise additional capital
or debt, or seek a merger or acquisition. The
skillset of the financial expert can often
challenge the company’s financial statements
and disclosures, and assess whether internal
controls and processes are adequate and
effective, all for improving shareholder
interests. If you are a private company
contemplating a public offering in the future,
you should consider establishing an audit
committee before then.
Audit committees function to provide
oversight to the independent auditor and can
help increase the flow of information from
management to auditor. The audit committee
also establishes procedures for receiving
complaints, including anonymous tips. Many
companies have established “whistleblower”
hotlines that report through the audit
committee.
Selection of audit committee members is the
key to establishing a truly effective committee.
Prior to the Enron scandal, many committees
were comprised of cronies of the CEO or
Chairman of the Board, or “members of the
good old boys network”. These committees
were essentially rubber stamped and lacked
the backbone that many audit committees
have today. Carefully select individuals with
the proper skills and background to serve on
your audit committee.
Audit committees should meet regularly
throughout the year and document the
meetings in a minutes book.
GordonS.MacLean, CPA