A relook into the role of the Audit Committee

Audit committee (AC) is one of the key committees out of the common committees in most companies eg nomination, risk, remuneration and the only mandatory committee required of all listed company in Singapore.

AC plays a key role in ensuring the integrity of the financial reports and is the oversight for all a company financial reporting, internal controls, systems and the external audit. It plays a important independent role in representing the shareholders’ and company interests. The ability of AC to exercise professional scepticism and exert effective challenge to the management is key to ensure that it serves its rightful objectives. 2 key attributes is needed to be able to project that ability, independence and expertise. AC in discharging its responsibility should display a professional and independent business-like approach in their work, any intimate approach going beyond this runs the risk of them becoming too close to management – casting doubts of a likelihood of insufficient challenge to the management. It is therefore important that the appointment of the AC chairperson by the Board must be an independent person and remains as such without being too close to the management during the term of appointment. All or majority of the AC members must also be independent of the Company and its management.

Interestingly, in one of the functions that AC performs is in the tendering and selection of the external auditor.  The UK CMA, Statutory Audit Services Market Study: Update Paper in december 2018 in its sample of several FTSE 350 companies audit tender processes found that factors such as ‘cultural fit’ and ‘chemistry’ (or “personal relationship) were often overriding others such as providing independent challenge.

Concerns about the independence of AC, their lack of attention to audit and the lack of emphasis they are placing on challenge, have driven the UK CMA to propose the appointment of external auditor by the regulator instead of AC.

Naturally, AC would also be tasked to fix the audit fee in the tendering and appointment of the auditor.  AC members who laud their ability to reduce audit fees raises concerns on whether such moves would resulted in a poor resourced audit, and therefore a poor quality audit that fails to serve it purpose to ensure and provide the level of investors’ assurance on the integrity of the financial report.

We have discussed the importance of independence both actual or perceived and how the lack of independence has led to the fallout of a regulator in yesterday article, “Conflicts of interest driving downfall of a regulator” dated 24 April 2019. Déjà vu and we see this again here, where auditor appointment would be taken out of AC and in the hands of an “independent” regulator.