What are the responsibilities of an audit committee?

Your Audit Committee Role

Before you jump headfirst into the year-end financial reporting process. You should review the role independent audit committees play in providing investors and markets with high-quality, reliable financial information.

Recent SEC statement

Also due to Securities and Exchange Commission (SEC) regulations, all public companies must have an independent audit committee. Or have the full board of directors act as such. Likewise, many not-for-profit entities and large private companies have assembled committees to oversee the financial reporting process. As a result, this can help reduce the risk of financial misstatement.

SEC leadership recently issued a joint statement. It highlights the following key areas of focus:

Tone at the top

Audit committees set the tone for the company’s financial reporting and the relationship with the independent auditor. The SEC statement encourages these committees to proactively communicate with auditors. And understand how they resolve issues.

Auditor independence

Above all this is a shared responsibility of the audit firm, the issuer and its audit committee. The SEC statement suggests that committees consider corporate changes or other events that could affect independence.

U.S. Generally Accepted Accounting Principles (GAAP)

The audit committee is charged with helping management comply with existing GAAP. The SEC statement reminds these committees to consider major new accounting standards. Most noteworthy the ones that have been adopted in recent years, including the new revenue recognition, lease and credit loss rules.

Internal controls over financial reporting (ICFR)

Audit committees are responsible for overseeing ICFR. The SEC statement stresses the importance of following up on the remediation of any material weaknesses.

Communications with independent auditors. Audit committees must openly communicate with external auditors throughout the audit reporting process. The SEC statement recommends discussing such issues as accounting policies and practices, estimates and significant unusual transactions.

Non-GAAP measures

Because these metrics, when used appropriately in combination with GAAP measures, can provide decision-useful information to investors. Therefore the SEC statement suggests that audit committees learn how management uses these metrics to evaluate performance. And finally whether they’re consistently prepared and presented from period to period.

Reference rate reform

Discontinuation of the London Interbank Offered Rate (LIBOR) may present a material risk for companies with contracts that reference LIBOR. As a result the SEC statement encourages these committees to understand management’s plan to address the risks associated with reference rate reform.

Critical audit matters (CAMs)

These are material accounts or disclosures communicated to the audit committee. That require the auditor to make a subjective decision or use complex judgment. Beginning in 2019, auditors are required to include CAMs for certain public companies in the auditor’s report. Hence, the SEC statement reminds audit committees to understand the nature of each CAM. Including the auditor’s basis for determining it and how it will be described in the auditor’s report.

Let’s work together

Consequently, collaboration between the audit committee and external auditors is critical. Regardless of whether a company is publicly traded or privately held. Contact us at 216.831.7171 with any questions you have regarding the financial reporting process.