THE VALUE OF A CORPORATE BOARD AUDITING COMMITTEE

You’ve heard the quote from Robert Frost’s 1914 poem, “Mending Wall,” that good fences make good neighbors. By the same principle in corporate business, good auditing committees make honest employees. Committees in corporate boards of directors are created to divide responsibilities so the full board can govern more effectively. Multiple committees focusing on different aspects of the day-to-day details allow the full board to focus on strategic policies and decisions for the whole corporation.

The value and effectiveness of a board auditing committee depend on its governing charter. A well-drafted committee charter keeps the committee in line, and a well-run committee keeps everyone in the corporation in line. It defines the specific purpose, authority, composition, and operating procedures of the committee and aligns members with organizational goals. Trust of employees is built in multiple ways, but is still fragile and subject to varying interpretations — but for the auditing committee, figures and reports that reflect those figures never lie.

Key Components of an Auditing Committee Charter

• Purpose/Mission: The financial reporting, internal controls, independent auditor relationships, prevention of waste in assets, protection against excessive and unnecessary liabilities, the wise allocation of resources, and accuracy in reporting all financial matters
• Authority: The scope of the committee’s areas of recommendations to the full board and the binding effect of its final decisions
• Composition: Qualifications for committee membership, term limits, degree of independence, and professional expertise requirements
• Procedures & Operations: Meeting schedules, quorum requirements for rule making, how minutes are recorded, and reporting procedures and deadlines expected by the full board

Duties and Responsibilities of the Auditing Committee

• Recommending to the board the selection, retention, or termination of the outside auditor
• Defining the scope, fee, risk factors, and general extent of the outside auditors’ annual audit. No limitations should be placed on the scope or nature of their audit procedures
• Reviewing the corporation’s accounting and financial reporting controls and requiring an annual report from outside auditors on the adequacy of the corporation’s accounting and financial reporting controls
• Reviewing with the COO and outside auditors generally accepted accounting and reporting principles, practices, and procedures applied by the corporation in preparing its financial statements
• Verifying the independence of the outside auditors and obtaining formal written statements explaining all relationships between the outside auditors and other consulting work being performed for the corporation
• Conducting annual reviews of conflict-of-interest statements by the auditing staff
• Reviewing the annual auditing report with the president and CEO and the outside auditors to verify that the outside auditors received cooperation during their audit, including access to all requested records, data, and any other information pursuant to current accounting standards relating to the conduct of the audit

The work of the auditing committee may not monitor the performance of all the employees or their capacity to perform their assigned duties, but it will safeguard the financial and property assets of the corporation and point out any mishandling of those assets. The effectiveness of the auditing committee is established by the charter document that sets up the committee and guides its work. To make sure your auditing committee charter is complete, you should contact the corporate lawyers at Corporate Securities Legal LLP. Their experience and expertise in corporate governance will give you peace of mind that your corporate assets are well protected.