Audit Committees – a pathway to successful corporate governance Audit Commission seminar Knutsford Court Hotel Thursday, 27 October 2016 Dennis Chung - PSOJ
Opening remarks Salutations Congratulate Audit Commission for this seminar as public sector CG is going to be key to bringing greater efficiency and reduction in waste and corruption to the Public Sector and consequently the fiscal accounts Audit Committees form a very important part of the CG framework and is in fact the only committee mentioned in the CG Code developed by the PSOJ (first in 2009 and revision to be launched next month after much review – also CG for MSME) Dennis Chung - PSOJ
Importance of Audit Committee What is the Audit Committee of the board? Sub-committee of the board Chairman cannot be a member of the Audit Committee Must be chaired by an external independent director (defined in the CG code) Internal Audit function reports directly to the Audit Committee and only is administratively reporting to CEO. Only Audit Committee can direct the Internal Auditor or terminate Dennis Chung - PSOJ
Audit Committee provision in CG Code PSOJ Code (revised with input from international codes in Australia, UK, and Barbados) Audit committee under Section D (Accountability and Audit) D.2: Risk Management and Internal Control Main Principle - The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems . The board ensures this through the Audit Committee Dennis Chung - PSOJ
Audit Committee provision in CG Code (S D3.1 to D3.6) D.3.1 The board should establish an audit committee of at least three, or in the case of small companies two, independent non-executive directors. In small companies the company Chairman may be a member of, but not chair, the committee in addition to the independent non-executive directors, provided he or she was considered independent on appointment as Chairman. The board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience. D.3.2 The main role and responsibilities of the audit committee should be set out in written terms of reference and should include: • to monitor the integrity of the financial statements of the company, and any formal announcements relating to the company's financial performance , reviewing significant financial reporting judgments contained in them • to review the company's internal financial controls and, unless expressly addressed by a separate board risk committee composed of independent directors, or by the board itself, to review the company's internal control and risk management systems • to monitor and review the effectiveness of the company's internal audit function • to make recommendations to the board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment, re-appointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor • to review and monitor the external auditor's independence and objectivity and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements • to develop and implement policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and to report to the board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken. • to report to the board on how it has discharged its responsibilities. Dennis Chung - PSOJ
Audit Committee provision in CG Code D.3.3 The terms of reference of the audit committee, including its role and the authority delegated to it by the board, should be made available . D.3.3.1 The Audit Committee has authority to: a) Conduct or authorize investigations into any matters within its scope of responsibility. b) Appoint, compensate, and oversee the work of any registered public accounting firm employed by the organization. c) Resolve any disagreements between management and the auditor regarding financial reporting. d) Pre-approve all auditing and non-audit services. e) Retain independent professional advisors to advise the committee or assist in the conduct of an investigation. f) Seek any information it requires from employees, all of whom are directed to cooperate with the committee’s requests, or external parties. g) Meet with company officers, external auditors, or outside counsel, as necessary. h) Monitor the activities of the internal audit ensuring its objectivity and independence in the performance of its duties. i) Ensure the internal audit function reports to the board through the Audit Committee. j) Facilitate the chief internal audit executive confirmation to the board at least annually on the organizational independence of the internal audit activity. Dennis Chung - PSOJ
Audit Committee provision in CG Code D.3.4 Where requested by the board, the audit committee should provide advice on whether the financial statements, taken as a whole, and give a true and fair view of the company’s financial affairs. D.3.5 The audit committee should monitor and review the effectiveness of the internal audit activities. Where there is no internal audit function, the audit committee should consider annually whether there is a need for an internal audit function and make a recommendation to the board, and the reasons for the absence of such a function should be explained in the relevant section of the annual report. D.3.6 The audit committee should have primary responsibility for making a recommendation on the appointment, reappointment and removal of the external auditors. JSE listed companies should put the external audit contract out to tender at least every five years. If the board does not accept the audit committee's recommendation, it should include in the annual report, and in any papers recommending appointment or re-appointment, a statement from the audit committee explaining the recommendation and should set out reasons why the board has taken a different position. Dennis Chung - PSOJ
Examples of Audit Committee involvement Explanation of experience with Audit committees and how they aided with governance: FGFS – chair of Audit Committee UTECH – member of Audit Committee GK Capital – chair of Audit Committee NSWMA Audit Committee (relationship) Dennis Chung - PSOJ
QUESTIONS Dennis Chung - PSOJ
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