An Audit Committee for Good Governance

The Financial Reporting Council (FRC) recently handed out its largest ever fine of £5m to PwC for the auditing of Connaught’s accounts, before the social housing group’s collapse seven years ago. A currently retired PwC audit partner was reprimanded for his involvement and fined £150,000 personally. After an investigation, the FRC found misconduct in three key areas: mobilisation costs, long-term contracts and intangible assets.

In defence, PwC argued that the firm was mislead by Connaught’s management. It’s therefore important to consider audit and risk as part of your good governance framework. Audit and risk committees have a duty to communicate with the board, but arrangements for the committee depend on your company’s size, complexity and risk profile. It is the audit committee’s responsibility to ensure that shareholders’ interests are protected.

What does an audit committee do?

An audit committee effectively ensures there is proper protocol in place for preparing and managing financial statements. In the case of smaller companies, an audit committee should be made up of at least two independent non-executive directors, having recent and relevant financial experience. Their responsibility includes:

• overseeing the integrity of the business’s financial statements,
• reviewing the internal financial controls,
• monitoring the internal audit function,
• Reviewing control and risk management systems (unless there is a separate risk committee), and
• monitoring the external auditor’s objectivity and independence

The audit committee should report to the board significant issues in relation to financial statements, effectiveness of the external audit process and any other relevant issues that the Committee deems relevant or require their opinion on.

Should there be any disagreement between the board and the audit committee which cannot be resolved, the audit committee should be freely allowed to report it to the shareholders in the annual report. A well-written annual report will convey your organisation’s strategy, identify main risks and mitigating actions and have relevant key performance indicators to demonstrate organisational performance. In addition, the newly required ‘viability statement’ will assess long-term health of your organisation and the risk of liquidity and solvency.

It is management’s responsibility to prepare accurate financial statements, but an audit committee which oversees best practice can ensure that your financial statements make complete and clear disclosures. The committee can advise you as to whether the report and accounts are accurate and balanced and provide shareholders with all information necessary to assess your business’s performance. It is also management’s responsibility to assess and monitor risk. Unless you have a separate risk committee or if the board is responsible for overseeing risk, management should provide the audit committee with reports on the risk management system and its effectiveness.

If you practise good governance when it comes to auditing and risk management your business is more likely to have long-term success. PwC blamed Connaught’s management, but you can avoid the same fate by having all your bases covered. Accountability is an important part of good governance and it is your duty to provide a clear assessment of your organisation’s performance and strategy. For more information on audit committees, read the FRC’s guidance here. If you need help preparing your annual report, don’t hesitate to contact us.