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Role of audit committee

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Audit committees are identified as effective means for corporate governance that reduce the potential for fraudulent financial reporting. FILE PHOTO | NMG

The scandals that have recently rocked companies such as Mumias Sugar and Uchumi Supermarkets have raised questions on the state of corporate governance in Kenya.

Corporate governance is very important component in the business world today, especially after the frequent non-stop worldwide financial crises. Strong corporate governance is now considered a basic condition to accept and register an organisation on the Nairobi Securities Exchange(NSE).

The audit committee plays a major role in corporate governance regarding the organisation’s direction, control, and accountability. As a representative of the board of directors and main part of the corporate governance mechanism, the audit committee is involved in the organisation’s both internal and external audits, internal control, accounting and financial reporting, regulatory compliance, and risk management.

Audit committees are identified as effective means for corporate governance that reduce the potential for fraudulent financial reporting. They oversee the organisation’s management, internal and external auditors to protect and preserve the shareholders’ equity and interests. To ensure effective corporate governance, the audit committee report should be included annually in the organisation’s proxy statement, stating whether the audit committee has reviewed and discussed the financial statements with the management and the internal auditors.

As a corporate governance monitor, the audit committee should provide the public with correct, accurate, complete, and reliable information, and it should not leave a gap for predictions or uninformed expectations.

The audit committee is responsible for overseeing the organisation’s disclosure process, ensuring that the organisation complies with the relevant local and international laws, implementing regulations and ethical standards and principles, and complying with the organisation’s bylaws and internal guidelines. The audit committee discusses with the organisation’s management, lawyers, and general counsel any litigation or regulatory compliance risks. Corporations may also have a chief compliance officer or ethics officer with whom the audit committee may discuss reported incidents or risks related to the entity's code of conduct.

At present, the audit committee plays a major role in corporate governance regarding the organisation’s direction, control, and accountability; and it is expected that the audit committee will play a broader corporate governance role in the future, and that the main parties in the governance field do and will support the committee strongly.

By performing all the above mentioned roles, auditing committee will be able to exercise power over management which will give independence to the auditor and that will result into authentic financial reporting. This will meet the expectation of all the stakeholders and mainly shareholders. Independent directors of audit committees will boost the quality of monitoring because they are not associated with the company either as bureaucrats or human resources; thus they would act as the shareholders watchdog.

Much more stress is placed on auditors in the perspective of corporate governance because in most of cases they will be the first persons to spot corporate abuse. This is due to the nature of auditing function and the purpose of auditing company accounts. It can also be a case of the only person who is aware of the misuse besides the wrongdoers. Thus, in many cases the auditors prefer to fall short to discover the wrongdoing at the expense of their duties and obligations.

Auditor has to be bold enough to bring forth all the facts in his report and there should be no hesitation on his part in disclosing the defects, defaults, irregularities, discrepancies etc., even if the management of the company is involved in the same.

The audit committee should discuss various matters with the auditor related to their independence and what audit committee expects from auditor in interest of shareholders and other stakeholders except the management. But it is not only expected from the auditors to do their duties diligently but they should have the guts to ask management questions regarding any matter which is related to shareholders and investing community.

The role of audit committee and auditors in current scenario become very crucial. Stakeholders expect loyalty and trust from auditor and auditing committee while resolving financial facts and exposing at all fraud and fault in organization. The audit committee member’s experience, relevant exposures, qualification background and in depth knowledge need to be highlighted and confirmed because if directors are experts, experienced, qualified, financial wizards, then they can have vision and foresightedness to protect stakeholders. If a company has an active and strong audit committee then independent auditors’ working will be supported.