“Allow yourself to think only those thoughts that match your principles and can bear the bright light of day. Day by day, your choices, your thoughts, your actions fashion the person you become. Your integrity determines your destiny”. ― Heraclitus

Following up on my previous article:

Rights and Authorities of the Audit Committee

The Audit Committee should have the right to seek any information it requires from employees all of whom should be directed to cooperate with the committee’s requests. The committee should also be authorized to invite any employee in committee meetings to discuss any matter deemed appropriate. Each member of the audit committee should have the right to unrestricted access to all corporate records, transactions, systems, procedures and other information; and should be entitled to ask for further information if so required to make an informed decision on any matter. Each member of the board should have access to independent legal or professional advice at company’s expense whenever they judge this necessary to discharge their responsibilities. The same should be applicable to the Audit Committee members. The committee members should be authorized to retain independent counsel, accountants, or others to advise the committee or assist in the conduct of an investigation.

Size of the Audit Committee

The size of an Audit Committee varies and depends upon the needs of the company and the extent of responsibilities delegated to the committee. However, at the least, an Audit Committee should be composed of at least three members most of which should be non-executive and independent, and the Chairman must be independent. The size should be consistent with the responsibilities assigned to the Audit Committee and the size of the company. We advise the establishment of an Audit Committee composed of members with the right skill sets to perform assigned tasks but should not be over-burdened which would affect their effectiveness. In addition, the members of Audit Committees should not have any conflict of interest with any other duties they may perform for the company.

Composition of the Audit Committee

Since primary responsibilities of Audit Committees is to oversee company’s financial and internal control systems, it is recommended that the committee should be composed of members who are skilled and competent in financial matters. We recommend that a majority of the Audit Committee members should have financial literacy qualifications. In addition to being financially literate, the members of an Audit Committee should be able to identify and evaluate risks, should have sufficient knowledge of designing and implementation of internal control environment, and should have clear understanding of the roles of internal and external auditors. The Audit Committee does not have to be fully comprised of members of the board. If the board lacks necessary financial literacy, the board may choose to appoint non-board members (experts) in the Audit Committee. Some of the personal characteristics the board should look for while appointing an audit committee include:

• The ability to act independently and be proactively in advising the board of any concerns.
• The ability to ask relevant questions, evaluate the responses and continue to probe for information until completely satisfied with the feedback provided.
• An ability and desire to constantly engage in self-development programs.
• Receptiveness to new ideas and tolerance for unconventional views.
• Ability to appreciate the company’s culture and values and a determination to uphold these company’s values coupled with a thoughtful approach to the ethical issues that may be faced.
• A professional approach to duties, including an appropriate commitment of time and effort.
• The courage to take and stand by tough decisions.
• Encouragement of openness and transparency which is demonstrated by the ability to accept mistakes and not to ascribe blame.

The characteristics of an effective Audit Committee include the following:

• Conducts its own affairs efficiently and responsibly and reviews its own performance annually.
• Ensures effective communication among those involved with the audit committee.
• Understands the company’s risks and the control systems aimed at addressing those risks.
• Drives for complete and accurate financial and non-financial information disclosures that reflect substance over form which can be issued on a timely basis.
• Conducts meetings independently and separately from time to time with internal and external auditors.
• Varies the duration of time spent for meetings, as needed, in order to meet changing and often increasing demands.
• Actively engages in the appointment, replacement or re-appointment of the external auditor.
• Has a strong and candid relationship with the external auditors.
• Evaluates and assesses the performance of external auditors, including the latter’s independence.
• Determines the scope and fee of the external audit and ensures that the audit is comprehensive.
• Determines the internal audit plan and adequacy of the internal audit scope, functions and resources and that the internal audit function has the necessary authority to carry out its work.
• Uses internal audit to review the way management manages business risks as well as how the risks are managed to enhance shareholder value.
• Evaluates the performance of the internal audit function, including having an external review periodically to assess the competency of the function.
• Ensures management is responsive to internal and external audit recommendations.

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

Hubert Rampersad