- Audit Committee Role
- Audit Committee Responsibilities
- Audit Committee Composition
- The Work of the Audit Committee
The distinct requirements of the Audit Committee in the Companies Act
Since July 1, 2009, it is a legal requirement that all listed companies must have an audit committee. Prior to that, audit committee requirements were set by the Swedish Code of Corporate Governance; now this is regulated by law. According to the Companies Act , the role of the audit committee, without affecting the responsibilities and duties of the board, is to:
- Monitor the company's financial reporting
- Monitor the effectiveness of the Company's internal controls, internal audit and risk management with respect to financial reporting
- Remain informed about the audit of group reporting and financial statements
- Review and monitor the auditor's impartiality and independence (including the provision of non-audit services)
- Assist in the preparation of proposals to the Annual Meeting of the auditors
There is no doubt there have been more strict demands on the composition of the audit committee. The company's audit committee is required to have at least one independent member with experience in accounting or auditing. In practice, there is a requirement that the committee should have an independent member with those skills. This requirement applies at the first AGM of the Company that took place after July, 2009.
The audit committee is recognized as a cornerstone of a successful and credible financial reporting, and both the demands and expectations placed on the Committee are increasing continuously.
Before the financial crisis struck, audit committees already had a broad responsibility by the Swedish Code of Corporate Governance. To stay ahead in today's changing economy, the audit committee has to raise new issues and tackle new focus areas. Companies will need strong leadership, not only from senior management but also from their audit committees.
The concept of independent members of the Audit Committee
Many companies are uncertain how to interpret the concept of independent members. It is the board itself which ultimately determines what meaning the concept “independent member” should have. However, it is generally accepted that an independent member should be independent in relation to the company, its directors and controlling shareholders. He should receive no money from the company other than the receipt of fees from the company.
Formal qualification criteria for independent members with experience in accounting or auditing
There are no explicit requirements for formal training in accounting or auditing matters, but it is up to each company to decide which skills should be considered adequate. For example, experience in corporate management is considered sufficient to meet this requirement. However, it is of great importance that the committee has the composition and skills to make it suitable for such a mission. Therefore, the committee's members should consist of those directors who are familiar with the company's financial conditions and who are independent from management. This applies even in cases where there is no audit committee and instead the preparation work is performed by the entire board.
Selection of independent members of the Audit Committee
For companies that have not previously maintained an audit committee, there are likely some challenges ahead. Among other things, they should consider how the independent member shall be appointed and what background that person is desired to have. According to the Companies Act, only directors may be appointed members of the audit committee. The audit committee shall be composed of at least two members and they cannot be employees of the company (the CEO and executive chairman, for example, cannot be members of the committee). The independent member shall be a full member of the board, appointed by the AGM.
If there is only one member of the audit committee that is independent and has experience in accounting or auditing, and if he leaves the board early, the board shall take action to assign a new member. Should the director be elected at the AGM, the election may wait until the next AGM, provided that the board forms a quorum with the remaining members and deputies. Accordingly, there is no need for the company in this situation to call for an extraordinary meeting.
The chairperson of the audit committee must be available to meet with the external auditor on a regular basis. An effective way to ensure this is for the chairperson to establish a regular series of face-to-face sessions prior to each audit committee meeting:
- The first session should be with the CFO to create the proposed agenda for the audit committee meeting, and to agree on information that will be provided to the committee.
- The second session should be with the external auditor to obtain the auditor's input on the agenda, discuss any concerns he or she may have and discuss the auditor's views on the progress of the audit.
The third session should be with the external auditor and management together. This meeting's purpose is to finalize the agenda, review the materials management has prepared, enable the chairperson to explore more fully any differences of opinion that may exist between management and the auditor, and determine how to present these matters to the audit committee.
The Audit Committee work plan
Another responsibility of the chairperson is to work with the external auditor and management to create an audit committee work plan for each fiscal year. This work plan should include regular matters that come before the committee in accordance with its charter, and any other matters of significant concern or interest that the chairperson, management and/or the external auditor believe the committee should be aware of and should discuss.
The audit committee work plan should include an educational component. We recommend that it include subjects such as:
- a tour of the balance sheet;
- an analysis of the income statement;
- a review of major subsidiaries;
- a discussion of financing vehicles;
- a series of presentations on the business of the company;
- a review of special corporate projects, such as major information technology initiatives or new acquisitions; and
- a review of new accounting and other external developments.
Audit Committee Leading Practices and Trends
This document summarizes certain leading practices for audit committees. It can be used to assess audit committee practices and to discuss agendas and other considerations with the audit committee chairman.
Audit Committee Resource Guide
Deloitte's Audit Committee Resource Guide helps audit committee members and management better understand the requirements, roles, and responsibilities of the audit committee.
Financial literacy self-assessment tool
It is a leading practice for companies to have a formal process for assessing the financial literacy of their audit committee members. Deloitte has published a financial literacy toolkit to assist company management and audit committee members in evaluating their own financial literacy.
The broken triangle
Deloitte’s white paper examines the underlying factors that lead to a disconnect between the members of this corporate triangle, and provides practical advice for repairing the relationships so these essential parties can work together more effectively to protect and propel organizations.