Hubert Rampersad

Following up on my previous article:

Duties and Responsibilities of Audit Committee

The duties assigned to an Audit Committee vary but a typical audit committee is responsible to perform most of the following duties:

a) Oversee Financial Reporting

The Audit Committee should be responsible for reviewing the company’s accounting and financial practices, reviewing the integrity of financial and internal controls and financial statements. The committee should:

· Review earnings releases and financial reports.

· Assess the appropriateness of management’s selection of accounting policies and disclosures in compliance with approved accounting standards.

· Ensure timely submission of financial statements by management.

· Review significant or unusual transactions and accounting estimates, including related party transactions.

· Review and understand management’s representations.

· Assess whether the financial report presents a true and fair view of the company’s financial position and performance and complies with regulatory requirements.

· Review and discuss possible improprieties in financial reporting or other matters, and ensure that arrangements are in place for independent investigation and follow-up regarding such matters.

b) Supervise External and Internal Auditors

We recommend that the Audit Committee should have a close relationship with both external and internal auditors of the company and should periodically evaluate their performance. The external auditor is responsible for auditing the financial statements whilst the internal auditor’s responsibility is evaluating the risk management, control and governance processes. Specific duties of an audit committee in this regard include the following:

· The Audit Committee should be responsible for the selection, appointment, remuneration, oversight and termination where appropriate of the external auditor, subject to ratification by the company’s board and shareholders.

· The external auditor should report directly to the committee.

· The Audit Committee should also be responsible for making a determination, at least once a year, of the external auditor’s independence, including:

Ø Determining whether its performance of any non-audit services has compromised its independence.

Ø Obtaining from the outside auditor a written report listing any relationships between the outside auditor and the company or with any other person or entity that may compromise the auditor’s independence.

Ø Monitoring the rotation arrangements for audit engagement partners.

· The Audit Committee should review and discuss with the external auditor the scope and results of audit, any difficulties encountered including any restrictions on its access to requested information and any disagreements or difficulties encountered with management.

· The Audit Committee should review and discuss with management and the external auditor each annual and each quarterly financial statements of the company including judgments made in connection with the financial statements.

· The Audit Committee should review and discuss, and make recommendations regarding the selection, appointment and termination where appropriate of the head of internal audit and the budget allocated to the internal audit and compliance function, and monitor the responsiveness of management to the committee’s recommendations and findings.

· The Audit Committee should also review and discuss the adequacy of (and the need to make changes in) the company’s internal auditing personnel and procedures; internal controls and compliance procedures; and risk management systems and procedures.

· Audit committee should oversee the company’s compliance with legal and regulatory requirements.

c) Assess Risk and Control Environment

Many times, and especially if there is no dedicated committee for risk management, boards request their audit committees to oversee the process of risk management and internal control implementation in company. If delegated to do so, Audit Committees should determine whether management has implemented appropriate policies and procedures to identify, assess, and measure risks in all areas of business and whether adequate controls have been implemented to mitigate those risks. The internal control framework should be capable to address the following components as defined by Committee of Sponsoring Organization (COSO):

• Control environment: this sets the tone of the company. It is the foundation of all aspects of internal control, providing discipline and structure. It includes the integrity, ethical values, and competency of the personnel.
• Risk assessment: identifies and analyses relevant risks that prevent the company from achieving its objectives and forms the basis for determining how those risks should be managed.
• Control activities: these are the policies and procedures that help ensure that the necessary actions are taken to address risks impeding the achievement of the company’s objectives.
• Information: must be identified, captured and communicated in a form and timeframe that enables personnel to carry out their responsibilities.
• Monitoring: assesses the performance of the control system on a continuing basis.

d) Other Responsibilities

An Audit Committee is also responsible to:

• Determine whether and how the company addresses conflict of interest situations and monitors compliance with related party transactions policy and/or mandate, including transactions or situations that warrant timely internal and regulatory disclosures and appropriate review and reporting.
• Review and supervise implementation of, enforcement of and adherence to the company’s code of conduct.
• Oversee the compliance with legal and regulatory requirements, codes and business practices and ensure that the company communicates with shareholders and relevant stakeholders (internal and external) openly and promptly, and with substance of compliance prevailing over form.
• Review and discuss arrangements for a ‘whistleblower’ program and ensure that arrangements are in place for independent investigation and follow-up regarding such matters.
• The information needs of the board to perform its monitoring responsibilities must be defined in writing, and regularly monitored by the Audit Committee.

This article will be continued in the next part of this column.

Hubert Rampersad