Audit committees are unique in that they can be established with outside, independent directors who are not directly involved in the organization’s day-to-day operations.
The Role of the Audit Committee in the Public Sector
Due to increased scrutiny in the public sector, many government agencies have been working to improve their fiscal responsibility. One of the ways they are doing this is by establishing an audit committee.
While this is a step in the right direction, some governments have established audit committees without truly understanding the roles and responsibilities of the committee. The result may be a false sense of security and a lack of effectiveness.
Defining an audit committee
What exactly is an audit committee? In Section 2(a)(3) of the Sarbanes-Oxley Act of 2002, Congress reaffirmed the American Institute of Certified Public Accountants’ definition of an audit committee as follows:
“A committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting process of the issuer and audits of the financial statements of the issuer; and if no such committee exists with respect to an issuer, the entire board of directors of the issuer.”
The primary purpose of the committee is to be a liaison and overseer of the work of an external auditor. An audit committee will typically consist of five to seven members — enough to possess the required skills, while remaining efficient.
Audit committee members may possess accounting, auditing, financial reporting, and other financial expertise. The committee should have an overall understanding of auditing procedure and the components associated with auditing in order to resolve issues reported by the external auditor.
Roles of an audit committee
Audit committees are unique in that they can be established with outside, independent directors who are not directly involved in the organization’s day-to-day operations. This allows the committee to devote more time to overall fiscal responsibility matters based on its defined roles.
Examples of effective audit committee roles include:
- Periodic meetings with government officials to review and monitor internal controls and preparation of financial reports.
- An active role in the overall prevention and detection of fraud while also encouraging management to establish a code of conduct.
- Making sure that proper fraud prevention and detection programs are in place and effective, and that a protocol exists, should a fraud occur (such as a fraud detection hotline).
- If an internal audit function exists, it should report directly to the audit committee. The committee can act as the “eyes and ears” of the overall internal control process, including how well the organization is doing to meet its financial responsibilities.
- Meet with the external auditors to get an independent perspective of management’s internal control efforts, and to verify that the external auditor is truly independent from those involved in managing the government organization.
Establishing a charter of roles
When establishing the committee, consider establishing a charter of roles and responsibilities. This will help define the overall fiscal responsibility and authority of the committee and its members.
If you’ve already established an audit committee, perform periodic evaluations and revisit the committee rules to help measure whether it is properly performing.
In today’s economy, where every expenditure of public dollars is scrutinized, an audit committee enhances the credibility of financial reporting, the independence of external auditors, and increases the reliability of financial reporting. Establishing an audit committee with well-defined roles and responsibilities will go a long way toward building a strong foundation of fiscal responsibility and accountability.
Todd Deindoerfer, Partner, State and Local Government
todd.deindoerfer@cliftonlarsonallen.com or 419-244-3711