The Audit Committee is a key governance structure charged with oversight over financial reporting and disclosure. Apart from the Statutory Audit Committee, as required (of public companies) by the Companies and Allied Matters Act, Cap C20, LFN, 2004 (CAMA) which is made up of an equal number of Directors and shareholder representatives, a company may also have a Board Audit Committee. Indeed, the CBN Code of Corporate Governance provides for the establishment of a Board Audit Committee made up of non-executive directors and chaired by an Independent Director.
The statutory duties and role of the Audit Committee are clearly encapsulated in Section 359 (3) and (4) of CAMA. In addition, the various Codes of Corporate Governance – the CBN, SEC and NAICOM Codes – set out the corporate governance role and responsibilities of the Audit Committee to include the following:
- Ascertain whether the accounting and reporting policies of the company are in accordance with legal requirements and agreed ethical practices;
- Review the scope and planning of audit requirements;
- Review the findings on management matters in conjunction with the external auditor and departmental responses thereon (Management Letter);
- Keep under review the effectiveness of the company’s system of accounting and internal control;
- Make recommendations to the Board in regard to the appointment, removal and remuneration of the external auditors of the company ensure the independence and objectivity of the external auditors and that there is no conflict of interest which could impair the independent judgment of the external auditors; and
- Authorize the internal auditor to carry out investigations into any activities of the company which may be of interest or concern to the Committee.
- Assist in the oversight of the integrity of the Company’s financial statements and establish and develop the internal audit function.
The Audit Committee has a responsibility to ensure that the company’s financials are void of any misrepresentation or misleading information. The Committee may also play a significant role in the oversight of a company’s risk management policies and programmes where there is no Board Risk Management Committee charged with this function.
The role of the Audit Committee in corporate governance has evolved in the wake of the corporate governance failures around the world and the Audit Committee has become increasingly relevant in enhancing confidence in the integrity of an organization’s processes and procedures relating to internal control and corporate and financial reporting. The Audit Committee has become one of the main pillars of corporate governance in checking and forestalling corporate misconduct. The effectiveness of the Audit Committee determines to a large extent the integrity of a company’s financials. The independence and competency of the Audit Committee are important factors influencing the effectiveness of the Committee.
To be effective, the Audit Committee should have a Charter that should clearly define its responsibilities and modus operandi. Audit Committee meetings should be well organised, efficient, and effective, and should occur often enough and be of appropriate length to allow for the discussion of relevant issues consistent with the Committee’s responsibilities. The Committee should enjoy appropriate internal and external support and resources and should ensure that minutes and reports to the Board reflect the significant activities, actions, and recommendations of the Committee.
An effective Audit Committee should have a well-respected Chairman with the appropriate leadership competencies as well as a good mix of members whose skills and competencies complement one another in terms of financial literacy, knowledge of the company’s business and industry as well as the applicable laws and regulations affecting the company. The Board should ensure that new Audit Committee members receive effective orientation and should encourage ongoing education for Audit Committee members. Members should be able to commit time and effort to the task; ask the right questions of Management, seek professional advice where necessary, recognize that the role is not merely ceremonial and above all, be men and women of integrity.