Role of Audit Committees in Corporate Governance

Group Members
Hafiz Mohammad Umer Mohammad Umer Arslan Nawaz Mohsin Khan Okasha Safdar Qaiser Ayuob L1F11MCOM0149 L1F11BCMH2022 L1F11MCOM2165 L1F11MCOM0156 L1F11BCMH2023 L1F11MCOM2158

Introduction
In recent years, continuous change in the way that companies do business has become standard practice and this change will continue at an accelerated pace The corporate governance approach to financial reporting requires a culture in which management accepts the function of the board of directors and its audit committee to oversee management. Audit committee is an operating committee of the Board of Directors which is charged with oversight of financial information reporting & its disclosure and internal controls.

Introduction (cont)
An audit committees responsibility will vary depending upon the entitys complexity, size, and requirements. Numbers of Audit committees members are also defined by law in some countries like in US maximum number of audit committee will be six and in Pakistan minimum numbers of audit committee members are three.

Introduction (cont)
Typically major responsibilities of audit committee are

Overseeing the financial reporting and disclosure process, Monitoring choice of accounting policies and principles,

Oversight of regulatory compliance,

Ethics, and whistleblower hotlines, and practices with management.

Audit committees in United Kingdom (UK)

Companies with a Premium listing of equity shares in the UK are required under the Listing Rules either to comply with the provisions of the Code or to explain to shareholders why they have not done so. Audit committee arrangements need to be proportionate to the task, and will vary according to the size, complexity and risk profile of the company. All directors remain equally responsible for the companys affairs as a matter of law The audit committee, like other committees to which particular responsibilities are delegated (such as the remuneration committee), remains a committee of the board.

Audit committees in United Kingdom (UK) (cont)

The board should establish an audit committee of at least three, or in the case of smaller companies two, independent non-executive directors. Appointments to the audit committee should be made by the board on the recommendation of the nomination committee, in consultation with the audit committee chairman. Appointments should be for a period of up to three years, extendable by no more than two additional threeyear periods, so long as members continue to be independent

Audit committees in United Kingdom (UK) (cont)

The main role and responsibilities of the audit committee should be set out in written terms of reference and should include:

To monitor the integrity of the financial statements of the company and any formal announcements relating to the companys financial performance Reviewing significant reporting judgments contained in them To review the companys internal financial controls and, unless expressly addressed by a separate board risk committee composed of independent directors or by the board itself, the companys internal control and risk management systems To monitor and review the effectiveness of the companys internal audit function To make recommendations to the board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment of the external auditor and to approve the remuneration and terms of engagement of the external auditor

Audit committees in Germany

In July 2001, the so called Baums commission accessible its final report and suggested the establishment of the Kodex commission, which set of contacts a German Corporate Governance in February 2002. The Baums commission recommendations covered issues of corporate finance, accounting, monitoring, and disclosure, and addressed various aspects of governance mechanisms and bodies such as the Executive (or Management) Board, the Supervisory Board, the auditor and chiefly shareholders as the wellknown stakeholder group

Audit committees in Germany (cont)

The audit committees have the following responsibilities:

Monitoring financial reporting Monitoring internal control, internal audit, and risk management system effectiveness Overseeing the statutory audit Reviewing and monitoring auditor independence and the provision of additional services to the audited entity Auditor appointment

Audit committees in Germany (cont)

The auditor is obligatory to account to the audit committee and shall support the audit committee in satisfying its tasks. Due to the difference between corporate management by the Board of Directors on the one hand and corporate monitoring by the Supervisory Board on the other, there is no tradition of audit committees in Germany Thus, the use of the term Audit Committee within the German institutional context may be misleading. Audit committees do so by dealing with all accounting and auditing issues that fall under the responsibility of Supervisory Boards, given the German institutional environment.

Audit committees in Germany (cont)

Audit committee composition in Germany reflects codetermination in Supervisory Boards. On average, 35% of audit committee members represent labor interests, followed by major shareholders and other shareholders (both groups account for 26%, respectively) and others (13%). In nine of 22 cases, labor legislature account for half of all audit committee members; four audit committees in the survey do not have labor representatives.

Audit Committees in Pakistan

According to Corporate Governance Rule 2013, The Board of Directors of every listed company shall establish an Audit Committee, which shall comprise not less than three members, including the chairman. The names of members of the Audit Committee shall be disclosed in each annual report of the listed company. The Audit Committee of a listed company shall meet at least once every quarter of the financial year. These meetings shall be held prior to the approval of interim results of the listed company by its Board of Directors and before and after completion of external audit.

Audit Committees in Pakistan (cont)

The terms of reference of the audit committee may also include the following, namely:

Determination of appropriate measures to safeguard the Public Sector Company's assets; Review of financial results; Review of quarterly, half-yearly and annual financial statements Public Sector Company, prior to their approval by the Board, focusing on

Major judgment areas; Significant adjustments resulting from the audit; The going-concern assumption; Any changes in accounting policies and practices; and Compliance with applicable accounting standards.

Audit Committees in Pakistan (cont)

Other responsibilities mentioned in Rules of 2012 are

Review of preliminary announcements of results prior to publication; Review of management letter issued by external auditors and managements response thereto; Ensuring coordination between the internal and external auditors of the listed company;

Determination of compliance with relevant statutory requirements;

Monitoring compliance with the best practices of corporate governance and identification of significant violations thereof; and Consideration of any other issue or matter as may be assigned by the Board of Directors (Securities and Exchange Commission of Pakistan, 2012)

Audit Committees in Pakistan (cont)

As far as Audit Committees are concerned they generally exercise responsibility in three important areas:
1. 2. 3.

Financial reporting. Corporate governance. Corporate control

The responsibility of audit committees in the area of financial reporting is to provide assurance that financial disclosures made by management reasonably portray the company's:
1.

Financial condition;

2.
3.

Results of operations; and

Plans and long-term commitments.

Conclusion

An audit committees responsibility will vary depending upon the entitys complexity, size, and requirements. To make audit committee more effective there should exists a comprehensive position prescription for the Audit Committee Chair members. But audit members must understand how such transactions require the judgments and choices management make, including the selection and application of critical accounting policies, judgments and estimates, and the potential for manipulation of financial statements, by management, as a result.

Conclusion (cont)

Audit Committee Charter responsibilities (includes ad hoc items and amendments) are comprehensively mapped into an annual work agenda (i.e., Committee responsibilities are integrated within a detailed calendar of scheduled meetings, agendas, matters, Management, Audit and other Assurance reporting requirements and Committee action, coordination and reporting). A comprehensive assessment of the effectiveness of each Audit Committees effectiveness is regularly is conducted (e.g., considering the Charters duties and responsibilities, providing feedback and reporting, taking timely, corrective action as required, and reporting on the review process in sufficient detail in all appropriate public documents so as to demonstrate its effectiveness).

Bibliography
Financial Reporting Council. (September 2012). Guidance on Audit Committees. United Kingdom. International Standards for the Professional Practice of Internal Auditing. (December 3, 2002). Practice Advisory 2060-2. Khler, A. G. (2005). Audit Committees in Germany Theoretical Reasoning and Empirical Evidence (Vol. 57). LMU Munich School of Management. Securities and Exchange Commission of Pakistan. (2012). Corportae Governance Rules. Securities and Exchange Commission of Pakistan. (n.d.). Public Sector Companies Corportae Governance Rule. 2013.

Siddiqui, M. F. (n.d.). A role of Internal Auditor & Audit Committee. Pakistan: Institute of Cost & Management Accountants of Pakistan.