Location:    Nepal

Is your audit committee effective?

An effective audit committee is a cornerstone of good governance. Since enactment of Company Act 2063, most of the public limited companies now have audit committees. But are you using audit committees as effectively as you could?

In our scenario, it is usually observed that Audit Committee are formed more to comply with regulatory requirement and are not taken as independent oversight body looking after the company affairs. The agenda of the Audit Committee meetings does not cover all statutory duties prescribed by Sec. 99 and meetings are limited to functions such as selection of external auditor and reviewing the work of internal auditor.

While primary responsibility for governance always rests with the board, it will look to its audit committee for much of its assurance. The committee oversees, on behalf of the board, the financial reporting controls implemented by management and the integrity of published financial information.

The relevant regulatory guidance

The law intends to make audit committee the guardians of the company for financial integrity, by assigning the role of ensuring truth and fairness of financial statements, selecting eligible external auditors, supervising and monitoring internal audit activity and review Internal Financial Control System and Risk Management System.

How to make audit committee effective?

 1.        Get a strong, experienced chairperson

A good, experienced chairman is crucial to the effectiveness of any committee. So, the way the audit committee works will largely be down to the chair. The chair of the audit committee is pivotal in establishing the ground rules of the relationship between the audit committee, the management and the external and internal auditors. So, the chair should be someone who have a good understanding of the company’s major economic, operating, and financial risks and a broad awareness of the interrelationship of the company’s operations and its financial reporting, including risks and controls related to financial reporting.

 2.        Create a audit committee charter

At the time Board creates an audit committee, the board/committee should develop a charter for the committee. The charter serves as a guide to the committee in carrying out the responsibilities delegated to it by the board and the responsibilities required by law. The Charter enables the committee to:

  • Compare actual performance with its duties and responsibilities
  • Helps set agendas for committee meetings.
  • Helps new members appointed to the committee understand their obligations.

3.        Ensure the effectiveness of internal audit

One of the major responsibilities of audit committee is to review the scope and effectiveness of the internal auditor and the capacity of the internal audit function to fulfill its objectives. So, the committee should:

  • Require the internal audit department to provide annual internal audit plan in beginning of the year
  • Ensure that internal audit plan covers all major risk areas of the organization
  • Review the budget and staffing for the internal audit function.
  • Monitor the coordination of audit work between the internal auditor and the external auditor.

4.        Maintain regular dialogue with external auditor

The audit committee should meet from time to time with external auditors without management presence. This will enable the audit committee to obtain the frank views of the auditors, independent of the potentially inhibiting presence of the executive, with whom the auditors need to retain a good working relationship. The committee should also discuss with the external auditor the capabilities and depth of the company’s financial management, including accounting, internal audit, and other personnel.

The audit committee should hold a pre-audit meeting to discuss the audit plan with the external auditor. After reviewing the audit plan, the committee may request the external auditor to perform additional work, such as expanded tests at high-risk locations or areas.

5.        Hire an expert

Appointing an expert member, like a Chartered Accountant in the audit committee could be very useful. Such member not just provide additional insight in the issues raised in the meeting, but such appointment also makes the committee really independent and gives a positive image to the other stakeholders of the organization.

6.        Make the committee visible

It is very difficult for an audit committee to be effective if the culture of the organisation is defensive, is closed to new ideas and audit is regarded negatively. A compliance culture should be espoused as a safeguard not only for the organisation as a whole but for each individual in the team.

So, the audit committee, board and senior management team should be seen to share the same values, the work of the audit committee should be transparent, and the Chairman in particular should be visible in the organization.

 7.        Follow up of unresolved issues

 Often audit committee meetings are conducted less frequently. So, the committee should ensure that unresolved issues aren’t simply lost after the meetings. That means having a mechanism in place whereby management can track the issues, work to resolve them, and then communicate to the committee how they ultimately were resolved.

Audit Committee- Provisions of Company Act 2063

Audit Committee-Mandatory for whom

  1. Listed companies with paid up capital thirty million or more and companies which are fully or partly owned by Government of Nepal.

Composition

  1. At least three members required, under the chairmanship of a director who is not involved in day-to-day affairs of company.
  2. Close relative of Chief Executive not eligible for being member of the committee.

Qualification & Experience

  1. At least one member shall be expert having professional certificate on accounting OR experienced in accounting and finance obtaining at least bachelor’s degree in accounts, commerce, management, finance or economics.

Main Functions

  1. Review accounts and financial statements.
  2. Ascertain truth and facts in such statements.
  3. Review Internal Financial Control System and Risk Management System.
  4. Supervise and review Internal Auditing Activity.
  5. To recommend the names of potential external auditor; fix remuneration, terms, conditions.
  6. Review and supervise the compliance of auditor towards standards, regulations, etc.
  7. Formulate policy related to Accounts; and appointment and selection of auditor and implement it.
  8. To assist in forming and providing long form audit report, if regulatory body requires.

Other Provisions

  1. Board report shall set out the activities and policies of the committee and name of the members.
  2. Chairman of the committee to be presented in General Meeting.