The meaning, membership composition and the supposedly statutory functions of an Audit Committee of an organization calls for a second look.  This is so considering the fact that many companies that have been given clean bill of health by their Audit Committees report, end up having financial problems shortly.  Examples include Enron and World.com in USA.  In Nigeria, the Managing Directors/Chief Executive Officers of 5 leading banks were relieved of their duties by the regulatory agencies.  The questions on the lips of many people are who were the Auditors of these banks and who were the members of the Audit Committee.  The issue of the Auditors will be an issue for another discussion.  This write-up is principally to discuss the composition of the Audit Committee and their perceived functions.

 

In Nigeria, the Audit Committee is defined as a “Committee of Directors and the enterprises shareholders representatives whose specific responsibility is to review the annual financial statements before submission to the Board of Directors”.  Usually, membership of the Committee is subject to the maximum number of 6 persons.

 

They were established to enable the Directors and shareholders be aware of important transactions taking place in the company, to enable the External Auditors alert Management where problems exists, to enable Directors to take their statutory responsibilities seriously; and to control the activities of dominance executives.

 

The following advantages are inherent when there is a functional Audit Committee in an organization:

1.     It increases public confidence in the organization.

2.     It allows for an independent review of audit process.

3.     It reduces the duplication of work by the Auditor.

4.     It improves quality of audit.

5.     It strengthens the roles of non-executive Directors.

 

Despite the advantages, it has been observed that many people who are appointed into the Audit Committees do not have the necessary academic qualifications, experience and integrity to perform in the Committee.  Their roles therefore become a mere academic exercise without any expected outcome.  They are just there without adding any value.

 

The statutory functions of an Audit Committee include:

1.     To make recommendation to the Board regarding the appointment, removal and remuneration of the company Auditor.

2.     To review the findings on Management letters in conjunction with the External Auditors and departmental responses thereon.

3.     To keep under close review the effectiveness of the system of account and internal control.

4.     To ascertain whether the accounts and reporting policies of the company are in accordance with the legal requirements and agreed ethical requirement.

5.     The committee may authorize the Internal Auditor to carry out investigation into any activity of the company which may be of interest to the Committee.

6.     The Committee is to make recommendation to the Board regarding the appointment, removal and remuneration of the company’s Auditor.

 

In a nutshell, the role of the Audit Committee is to oversee, monitor, and advice company Management and the External Auditors in preparing financial statements, subject to the ultimate authority of the Board of Directors.  In the past, the Managing Directors of some companies have been removed due to the discoveries of irregularities in their mode of operation.  The question now remains WHERE ARE THE ONCE VIBRANT AUDIT COMMITTEES?