Managing Fraud Risk: A Practical Guide for Directors and Managers

The Role of the Audit Committee

Introduction

The concept of the audit committee is now well established in many countries around the world as a crucial component of good corporate governance. Most codes of governance devote significant attention to the role of the audit committee, including the UK's Corporate Governance Code. The SOX significantly enhanced its importance in US companies and the 8th Directive on company law introduced a statutory requirement in 2006 that all listed companies in the EU must have audit committees.

There are now many similarities in the role and composition of the audit committee in listed companies. First, the audit committee is a committee of the board to which responsibilities are delegated, which are normally set out in a charter. Also, the committee should now comprise independent non-executive directors only, at least one of whom should either be a financial expert or should have recent and relevant financial experience. This means that executives such as the CFO and CEO should not be members of the audit committee. The numbers on the audit committee normally range from three to six. Finally and crucially for good corporate governance, both the external and the internal auditors will have reporting lines into the audit committee.

The precise responsibilities of an audit committee may vary from jurisdiction to jurisdiction, but there are now many similarities about the role. Generally, audit committee responsibilities will include the monitoring, ...