The Audit Committee
The third part of our Corporate Governance series, we will be covering the functions and responsibilities of an Audit Committee within an organization, which is fundamentally about accountability and good governance.
Pursuant to Paragraph 15.10 of the Listing Requirements, all listed companies in Malaysia must have an Audit Committee. This committee will provide the Board of Directors with assurance on the reliability and quality of the financial statements, which certain information shall also be made available to the public.
While the Board is responsible for the accuracy and reliability of the company’s financial information, it may not be practical for them to keep up with the continuous changes and complexities of financial reporting. The Audit Committee, therefore, functions as an additional and more specialized oversight reviewer of the financial reporting process.
An effective Audit Committee must be seriously aware of its position within the organization, and should assume the following key responsibilities:-
- Assess risks and control environment – the Committee must determine that the management had implemented sufficient policies to identify and evaluate risks, and controls are in place to address these risks.
- Oversee financial reporting – assess the appropriateness/relevancy of accounting policies and disclosures in compliance with approved accounting standards. Further, the Committee is also expected to assess whether the financial report presents a true and fair view of the company’s financial position and performance.
- Evaluate the internal and external process – there are 2 parties involved, namely the external and internal auditors. The external auditors are responsible for auditing the financial statements of the company whereas the internal auditors are responsible for evaluating the risk management, control and governance process. The Committee, therefore, functions to coordinate both parties’ efforts and review their competencies.
- Review conflict of interest situations and related party transactions – related party transactions may present potential conflict of interest and probably cause a company decision made based on a consideration not to the best interest of its shareholders. The Committee is responsible to determine the company’s policies with regards to these transactions, and ensure timely internal and regulatory disclosures are made, including appropriate review exercises and reporting.
While the size of the Audit Committee varies, the Listing Requirements requires a company to appoint minimum of 3 members. All members must be non-executive directors, with a majority being independent. At least one member of the committee must fulfill the financial expertise criteria of the Listing Requirements.