The Audit Committee

Summary

This video explains the composition and role of the Audit Committee within a corporation. It highlights that the Audit Committee is a subset of the Board of Directors, consisting only of independent directors, with at least one financial expert. Their primary responsibilities include hiring the external auditor, overseeing the company's financial reporting, and addressing any issues between the external auditor and company executives. Additionally, they ensure whistleblower protections within the company and help manage disputes, making the Audit Committee crucial for financial integrity and transparency.

Takeaways

• 😀 The Audit Committee is a subset of the Board of Directors, meaning it consists of some members of the Board, but not all of them.
• 😀 The Board of Directors is elected by shareholders to oversee the company's operations, including hiring and firing the CEO.
• 😀 The Audit Committee is composed of independent directors, meaning they cannot have material interests in the company.
• 😀 The CEO cannot be a member of the Audit Committee because the CEO is an inside director and not considered independent.
• 😀 At least one member of the Audit Committee must be a financial expert, such as a certified public accountant (CPA).
• 😀 The Audit Committee's primary role is to hire the company's external auditor, who is responsible for reviewing the company’s financial statements.
• 😀 The external auditor issues an audit opinion on whether the company’s financial statements comply with GAAP (Generally Accepted Accounting Principles).
• 😀 If there are any issues between the external auditor and the company’s executives, the Audit Committee intervenes.
• 😀 If the external auditor discovers fraud, they must report it to the Audit Committee.
• 😀 The Audit Committee is responsible for establishing processes that allow employees to report issues or fraud (e.g., a whistleblower process) without fear of retaliation.

Q & A

What is the Audit Committee, and how is it related to the Board of Directors?

The Audit Committee is a subset of the Board of Directors. It is formed by selecting members from the Board of Directors to oversee the company’s financial processes, ensuring proper reporting and auditing of financial statements.

How many people are typically on the Board of Directors, and how many serve on the Audit Committee?

The number of people on the Board of Directors can vary, but for example, if there are seven members on the Board, three of them would typically serve on the Audit Committee.

What is the main responsibility of the Audit Committee?

The main responsibility of the Audit Committee is to ensure the accuracy and integrity of the company’s financial reporting, which includes hiring an external auditor and addressing any issues that arise during the audit.

What makes a director eligible to serve on the Audit Committee?

To serve on the Audit Committee, directors must be independent. This means they cannot have a material interest in the company, such as being a large shareholder, a company officer, or the CEO.

Why is the CEO not eligible to serve on the Audit Committee?

The CEO is not eligible to serve on the Audit Committee because they are considered an inside director, meaning they have a direct interest in the company’s operations and are not independent.

What is the significance of having a financial expert on the Audit Committee?

At least one member of the Audit Committee must be a financial expert, typically someone with a background such as being a CPA, to ensure proper oversight of the company’s financial reporting and auditing processes.

What role does the Audit Committee play in relation to the external auditor?

The Audit Committee is responsible for hiring the external auditor, overseeing their work, and mediating any disputes that may arise between the external auditor and the company’s executives. It also ensures the auditor’s independence.

What happens if the external auditor discovers fraud during their audit?

If the external auditor discovers fraud during their audit, they are required to report it to the Audit Committee, which will then take appropriate actions.

What is the role of the Audit Committee in relation to the company's employees?

The Audit Committee is responsible for setting up processes that allow employees to report any issues, including fraud, in a confidential manner, ensuring they are not retaliated against for coming forward.

Why is the Audit Committee important for corporate governance?

The Audit Committee is essential for corporate governance as it ensures the financial integrity and transparency of the company, protects shareholder interests, and prevents fraudulent activities by overseeing financial reporting and audits.