Role of Audit Committee in Corporate Governance (2)
In ordinary and common language, the primary purpose of the audit committee is oversight. The committee for the purposes of the CAMA shall assist the Company in overseeing:-
• Management’s handling of the company’s financial reporting process;
• The integrity of the financial statements and other financial information provided by the company to the regulatory authorities and the general public;
• The company’s system of internal accounting and financial controls;
• The company’s compliance with legal and regulatory requirements;
• The performance of the company’s internal audit function;
• The independent auditors’ qualifications, performance, and independence; and
• The annual independent audit of the company’s financial statements.
• The appointment, re-appointment and remuneration of the independent auditors, subject to approval by shareholders in general meeting.
It should be noted that a company’s management is responsible for preparing the financial statements. The independent auditors are responsible for auditing those financial statements. Management, including the internal audit function, and the independent auditors, have more time, knowledge, and detailed information about the company than the audit committee members. Consequently, in carrying out its oversight responsibilities, the committee is not providing any expert or special assurance regarding the company’s financial statements, or any professional certification as to the independent auditors’ work, including with respect to auditor independence. Each member of the committee shall be entitled to rely on the integrity of people and organisations from whom the committee receives information and the accuracy of such information, including representations by management and the independent auditors regarding non-audit services provided by the independent auditors. The above not withstanding members of the committee must take reasonable steps to ensure that they are properly informed and also take steps to verify information supplied. If need be they could utilise the services of external experts. It is good practice for the committee to utilise external professional services. In other words the committee owes the company a duty to be reasonably knowledgeable and informed about the company’s financial reporting, legal and regulatory compliance systems etc.
The audit committee has grown in importance and is continually being saddled with increased responsibilities. The composition of the committee as regards the constituencies from which members shall come has been statutorily settled by section 359 CAMA which provides that the committee shall be made up of an equal number of directors and shareholders not exceeding 6 persons. So the membership of the audit committee in Nigeria is limited to shareholders of the company and directors of the company in equal proportion. Beyond the statutory provision of the composition there is also the other issue of attributes to be expected of the members.
Who can be a member of the audit committee? The law is that (S. 359(5)) any shareholder can be nominated by any member of the company as a member of the audit committee by giving notice of such nomination in writing to the secretary of the company at least 21 days before the annual general meeting at which meeting an election would be conducted to establish the committee. The law is silent as to how the directors’ component of the committee is to be selected.
Who should be a member of the audit committee? The objectives and functions of the audit committee are onerous and knowledge specific, therefore though the law permits any shareholder or director to be elected into the audit committee, regulatory initiatives, best practices and prudence requires that only persons with certain attributes should be elected into the committee.
The relevant skills and experience required are such that would make such a person an effective audit committee member. In this regards the SEC code provides for some “literacy requirement” qualification for the membership of the audit committee, to the extent that every member should have basic financial literacy and should be able to read and understand financial statements, whilst at least one (director component) member should have some advanced knowledge of accounting or financial management; whilst at least one of the directors on the committee should be financially literate. (This is for emphasis because all members are required to be financially literate).
Beyond basic financial literacy, some form of expertise is now required by best practices; In Nigeria the audit committee is saddled with oversight of the auditing/accounting procedures, corporate governance, compliance and agreed ethical practices amongst others. These are not the run of the mill activities, consequently accounting, legal, compliance and ethics expertise (advanced knowledge) are required to effectively discharge the responsibilities of the audit committee. It should be noted that the basic obligation to be financially literate is a core obligation and it is the responsibility of the individual member to achieve and sustain this literacy requirement. This could be done through continued education and training etc.
In addition to technical skills, equally important are characteristics that people bring. It has been noted that good audit committee members have to be very inquisitive, very diligent, and very good listeners who are able to distil issues, make judgments on them, and be able to confront challenges and difficult situations. Such a member should be willing to admit that s/he does not know everything and that s/he can be convinced of a different opinion. So that ability to see through all these challenges and be able to deal with them very effectively makes a very effective audit committee member.
Sir Chukwu Jideani 08051789348 (SMS Only)