Glossary term
Audit Committee
Subject: Governance, Board and Committees
An audit committee is a board sub-group, usually made up mostly of independent directors, that oversees financial reporting, internal controls, internal and external audit, and how the company handles compliance concerns.
Explanation
The committee sits between management and the full board. It reviews the annual accounts before they are published, agrees the internal audit plan, and decides on the appointment, pay and independence of the external auditor. It also receives reports on control weaknesses and, in many companies, on whistleblowing complaints. Members are normally non-executive, and listing rules or company law often ask for at least one with financial expertise. The head of internal audit and the external auditor meet it, sometimes without management in the room, so they can speak freely. Its job is oversight: management prepares the numbers and runs the controls, and the committee questions them. When it is weak, problems stay hidden until they appear as restatements or enforcement cases. Regulators reviewing a failure usually ask first whether the committee saw the warning signs and what it did next.
Example
A listed manufacturer's internal audit team finds that revenue was booked early at two plants. The head of internal audit takes the finding to the audit committee, not only to the finance director. The committee asks management for a correction plan, calls in the external auditor to discuss the effect on the accounts, and tracks the fix at each quarterly meeting until a retest is clean.
Not to be confused with
- Risk Committee (Board)
- An audit committee looks at reporting and assurance. A risk committee looks at risk appetite and the overall risk profile.