Audit Committees - What, How and Why

Public companies, state-owned companies or any company, required to do so by its own memorandum of incorporation, must have an audit committee (section 94 of the Companies Act, 2008).

A company that is a subsidiary of a company that has an audit committee which will perform the actions required does not have to have its own audit committee. The audit committee must be elected by the shareholders at each annual general meeting, which signifies its importance.

Responsibilities

Audit committees, as the name connotes, are largely responsible for the audit activities of a company – everything from engaging with and nominating a company’s independent, external auditor, to preparing a report to be included in a company’s annual financial statements. The report includes commentary on the company’s accounting practices and financial controls. An audit committee’s role includes overseeing financial management, performance management, internal audit, and external audit and compliance functions.

Members

An audit committee comprises at least three members who must be directors of the company. At least one third of its members must have academic qualifications, or experience, in areas prescribed in the regulations to the Companies Act including economics, law, accounting or human resource management. An audit committee member

• Cannot be a full-time employee or prescribed officer of the company or of a related or inter-related company, a material customer or supplier or involved in the company’s day to day management.
• Must be impartial, objective and virtuous in the context of the functions that the audit committee is tasked to perform. Functions undertaken by an improperly constituted audit committee may be void.

Roles

In the words of the King Report on Governance for South Africa (King III), an audit committee "fulfils a vital role in corporate governance” by seeing to it that the company’s financial, accounting and reporting practices are sound and properly carried out. The audit committee must ensure the integrity of the processes and the reports produced. An audit committee must appoint an appropriate person to act as auditor for a company – it must ensure that this person is not only skilled and registered, but properly independent of the company. Audit committees play a key role in accountability, transparency and the integrity of financial control. King III proposes that all companies (not just the ones required to do so), should have an audit committee. Companies can use audit committees proactively to assess potential risks to the company for example audit quality and assessing financial and other integral risks to the company. For example, establishing ongoing communications between the committee and the auditor allows the auditor to obtain the information necessary to conduct the audit and allows directors to oversee the financial reporting process.

Use wisely

Audit committees are well positioned to undertake financial risk management and promote meaningful reporting to shareholders and stakeholders. When used properly, audit committees should be viewed as worthwhile strategic tools for companies, rather than a begrudged compliance exercise.