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Executive Summary

x | Audit Committee Effectiveness What Works Best

The global capital markets rely heavily information and to get that information
Interview insights
on the quality of financial statements. sooner. This environment makes the
Our industry is The economic crisis that started in 2008 audit committees responsibility to over-
currently suf- increased the focus on both the role of see the companys financial reporting
fering from the audit committee and the information more difficult. The committee must be
companies disclose. The audit com- aware of the financial reporting risks to
mittees role in ensuring accurate and focus its attention appropriately. And it
and regulatory
transparent disclosure is more important cannot lose sight of the need to maintain
today than it has ever been. Clearly, the its skepticism. This chapter highlights
many compa-
job is also more difficult and challenging ways the committee can best understand
nies and audit than ever given increased expectations and monitor the companys financial
committees are by shareholders, regulators, and other reporting.
focusing on rules stakeholders; heightened scrutiny when
and compliance. things go wrong; more responsibility for 2. Risk Management and the System
We need to be risk management; and more focus on of Internal Control
more balanced the need for fraud prevention. Given how many risks known and
and refocus our unknown a company faces, its a chal-
attention back The bottom line is that people expect lenge for a board or audit committee
on the business. more from audit committees today, to get comfortable that the company is
AC Chair
and this publication provides insight addressing risk appropriately. One of the
into audit committee leading practices difficulties facing the audit committee is
that can help committees meet those clearly defining its risk responsibility rela-
expectations. tive to that of the entire board. While the
companys system of internal control is
What the chapters cover
designed to help mitigate risk, the audit
1. Financial Reporting and Disclosures committee focuses particularly on con-
Financial reporting disclosure require- trols relating to financial reporting, fraud,
ments have been steadily increasing for and compliance. This chapter helps the
a number of years, in tandem with the committee to better understand the risks
complexity of accounting standards. that most likely fall within its scope and
Regulators and financial statement users how to monitor whether the company
continue to press companies for more is addressing those risks appropriately.

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3. Culture and Compliance 5. Relationship with External Auditors
The Soul of Corporate Accountability The audit committee has to select the
The companys culture and code of right external auditors to conduct a qual-
conduct are critical factors in creating ity audit. As part of executing their audit
an environment that encourages com- plan, the external auditors provide the
pliance with laws and regulations. The audit committee with assurance regard-
audit committee must recognize how ing the companys financial reporting.
critical the right tone at the top of the Additionally, external auditors are in a
company is and ensure what its hearing unique position to provide unfiltered
in the boardroom is what employees are and unbiased feedback to the committee
hearing throughout the company. This about management and the companys
chapter provides insights that help the processes. This chapter guides the com-
committee understand what elements mittee through the ways to evaluate and
compliance programs should have to appoint auditors and to develop and
promote proper conduct and behavior maximize the value of external audit
throughout the company. relationships.

4. Oversight of Management and 6. What to Do When Things Go Wrong

Internal Audit Financial Statement Errors and
The audit committee needs to oversee Fraud Investigations
management while taking care not to step At times, breakdowns in financial report-
into managements role. Establishing an ing processes lead to potential errors in
effective relationship with management previously issued financial statements.
is essential it allows the committee Management and the audit committee
to effectively monitor the companys have to assess whether an error is mate-
financial reporting practices and evaluate rial and, if it is, take steps to resolve
managements competence. Similarly, the situation. The situation can become
the committee relies heavily on internal more complex if the error results from
audit to provide an objective view on how fraud. The committee also might have to
the company is handling a number of key become involved when allegations arise
risks, including those relating to financial of bribery or other forms of fraud. In
reporting and compliance. This chapter such cases, the committee may have to
discusses how the committee builds effec- oversee an investigation. This chapter
tive relationships with both management discusses factors for the committee when
and internal audit. it must consider a possible restatement
or oversee an investigation.

xii | Audit Committee Effectiveness What Works Best

7. Committee Composition 9. Supporting Committee Effectiveness
Composition and leadership are criti- Charter, Evaluations, Resources,
cal in supporting the audit committees and Training
ability to carry out its responsibilities The charter documents the audit commit-
effectively. The committee needs the tees purpose, roles, and responsibilities.
right combination of skills and experi- It helps distinguish the committees
ence. It also needs a chair with the responsibilities from those of the full
knowledge and commitment to drive the board of directors. An audit committee
committees work. This chapter discusses that periodically evaluates its perfor-
considerations for selecting committee mance will be able to identify ways to
members and the chair and for determin- improve its effectiveness. Orientation
ing how large the committee should be. training for new members and ongoing
development for all members are essen-
8. Meetings tial, particularly given the velocity of
To ensure committee meetings run well, changes to financial reporting and gover-
the committee needs to have the right nance standards. This chapter discusses
agenda and receive the right materials considerations for the committees char-
beforehand. The attendees, and how ter, methods the committee can use to
they interact with committee members, assess its performance, and ways to meet
also influence the success of meetings. its training objectives.
Given how many responsibilities the
committee has, it needs to ensure it is
meeting often enough and at the right
points during the year. This chapter
describes ways the committee can cre-
ate an effective meeting environment,
allowing the members to engage in
meaningful discussion and make the
most of private sessions.

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