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The effective audit committee
A short article in CGMA Magazine, Ingredients of an effective audit committee, caught my eye. I recommend reading it.
I think there are some key ingredients to an effective audit committee that are often overlooked. They include:
- The members have to read all the material for the audit committee meeting before the meeting. It’s amazing how often they don’t, which reduces the meeting to absorbing the material rather than a constructive discussion of its implications.
- The members have to be ready, willing, and able to constructively challenge all the other participants, including the external and internal auditors as well as financial, operating, and executive management. Too often, they are deferent to the external auditor (for reasons that escape me) and too anxious to be collegial to challenge senior management.
- They need a sufficient understanding of the business, its external context (including competitors and the regulatory environment), its strategies and objectives, risks to the achievement of its objectives, and the fundamentals of risk management and financial reporting, to ask the right questions. They don’t need to have a deep understanding if they are willing to use their common sense.
- They need to be willing to ask a silly question.
- They need to persevere until they get a common sense response.
- No board or committee of the board can be effective if they don’t receive the information they need when they need it. I am frustrated when I read surveys that say they don’t receive the information they need – they should be demanding it and accepting no excuses when management is slow to respond.
- Audit committee members will not be effective if they are only present and functioning at quarterly meetings. They need to be monitoring and asking questions far more often, as they see or suspect changes that might affect the organization and their oversight responsibilities.
What do you think?
I welcome your comments.
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Norman Marks on Governance, Risk Management, and Audit 
Hi Norman,
Ingredients is an interesting choice of words. The analogy with cooking is not far off. Indeed, good quality ingredients (=inputs) can go a long way when you are trying to cook a tasty dish (=output).
However, scrutiny from supervisory authorities is increasingly shifting some of the focus from the inputs towards the outputs. In other words, audit committees will increasingly be required to demonstrate their effectiveness.
How can they achieve this without causing to much pain? As you know, there is not always a one-to-one relationship between information provided to the audit committee and questions or request that come out. A part of the work performed may sometimes difficult to demonstrate.
Looking forward to your thoughts on this.
Regards
Frank Van Hyfe, CIA, CISA, CRISC
Thanks Norman
The real advantage in having a properly functioning, independent audit committee, is having members who not only have the ability to help with the various Governance requirements (I take that as a given), but to be able to share their diverse skills, background, and knowledge to help management and the organisation they work for, to be more successful.
If they don’t understand the organisation, only turn up for meetings, and haven’t read the papers, get rid of them, they don’t deserve to be there, nor receive their pay cheque.
Andrew Dix (Australia)
I could not agree more with the contents of your article!
When the audit committee is ineffective, change should be led by the chair of the committee. The CAE can have a quiet word in his year.
Excellent list. I would add that they also need to build a trusting relationship with the internal audit function in order to know what is really going on. There are many good internal audit functions with weak audit committees, but there are no good audit committees with weak internal audit functions. Think about it.
I must fully support John Fraser’s last comment on the relationship with the internal audit function and the audit committee. In my capacity, I am the “dotted line” reporting to the audit committee and the internal control functions – alignment here makes this job easier. If there is misalignment then you risk the audit committee focussing (or worse not focussing at all) on the wrong issues.