Exploring the Composition and Accountability of Audit Committees

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Presence of an audit committee has several implications in the process of financial monitoring. An audit committee has been effective in fostering transparency and accountability in all activities involving financial recording, analysis and reporting. To enhance realistic corporate governance as well as increase the quality of financial reports, mechanisms focusing on audit committee's structure have been undertaken. This has been prompted by the realization that the mere existence of an audit committee does not automatically lead to an effective financial monitoring body. From the provisions of the Sarbanes-Oxley Act of 2002, there are many guidelines on the best practices that need to be observed in today's financial environment. Depending on the Audit Committee in consideration, varied charters have been applied. For instance, there exist variations in the requirements for the composition, operation and operation for the audit committees in the U.S and Australia. Audit Committee's independence and underlying expertise in Finance are very vital for the maintenance of an effective body. Audit Committee requirements have had significant results in the United States and Australia. Therefore, the composition and accountability of Audit Committee have played a major role in the maintenance of effective financial reporting.

Requirements for the Audit Committee

The drastic rise in financial market turmoil has necessitated the creation of strong audit committees. Existence of strong audit committees has restored sanity in the financial market. The significance of Audit Committee has mainly been seen through the existence of several shifts to the right practices in financial markets. To start with, audit committees have led to the provision of clarity, accuracy as well as maintenance of relevance in all financial reporting activities (Keinath, 2009). Similarly, the existence of audit committees in capital markets has led to the maintenance of company's reputation as well as confidence. Thus the audit committee has played a critical role towards the building and maintenance of trust in financial reporting in the respective environments. Top of the reasons for the existence of audit committee is on financial reporting process. Thus the committee oversees that the whole process is up to the required standards. In a financial, market that shows volatility and increased malpractices, presence of a well maintained and rightfully governed audit committee is very essential.

The annual and quarterly financial statements are the basis for the financial reports. The financial condition and operational performance are adequately measured through the financial statements. By reviewing the financial statements presented during the quarterly and annual reports, an audit committee maintains accountability (Mardjono, 2005). The review of the financial statements by the audit committee also includes the services of meaningful personalities such as the management and external auditors. The reviews made by the audit committees also require appropriate discussion with the management and auditors. The results of the review process by the audit committees are very vital for a company. Therefore, it is a critical requirement that they are exclusively addressed in the presence of the main stakeholders of a company. In practical contexts, few audit committees regard discussion of quarterly financial statements with high importance. However, this has led to undesirable results. Thus the diversification of the requirements for the audit committee has been due to the need for better performance in the financial markets (Keinath, 2009).

Monitoring the choice of accounting policies and principles is one more reason for the requirement of audit committee. In fact, the type of accounting principles chosen by an organization has significant impacts on the financial statements. As a requirement of the Sarbanes-Oxley Act, audit committee has to obtain information from the auditor on the principles applied. Similarly, the impacts of other alternative choices on the financial statements need to be disclosed. In addition, the audit committee monitors the process of internal control. As a matter of fact, the committee ensures that the management develops and follows a sufficient system of internal control. Therefore, the committee ensures that best practices of internal control are upheld at all times. One very paramount role played by the audit committee relates to communication. Besides other roles, the audit committee maintains an open communication among all stakeholders in an organization. These include the management, internal auditor, external auditors as well as the audit committees. Thus the audit committee has to meet separately with each of the group; regularly or when need arises. Finally, the audit committee oversees the process of hiring and the eventual performance of the external auditors (Keinath, 2009). From the foregoing, the passage of the Sarbanes-Oxley Act intensified the reasons for the requirement of audit committee; more so when monitoring the external audit.

United States and the Australian contexts and Audit Committee requirements

Depending on the environment of operation, audit committees differ. The audit committees in the United States and those in the Australian contexts depict recognizable variations. The requirements for the composition, operation as responsibilities of the audit committees in the two regions are different. Australia has a unique market courtesy of its geographic location and the small size. Therefore, there are certain priorities, activities and processes undertaken by the audit committees solely to favor the country's circumstances. Comparison of the audit committees in the United States with those in Australia is thus interesting and constructive (Sori, 2005). The comparison of the audit committees in the two countries puts into account critical data from respective audit committees. In a broad focus, Australian Audit Committees exhibit similar requirements as the committees in many other countries; the United States being one of them (KPMG, 2008).

Both the United States and Australian audit committees consider risk management, accounting judgment and accounting estimates being the major three priorities. Similarly, the audit committees in the two countries have a great regard for financial reporting standards. A difference in the extent of regard for the maintenance of steady and up-to-date information technology in the two countries show some disparity. The audit committees in the United States regard the information technology and data security as one of the most important priority in financial reporting (KPMG, 2008). This is contrary to the Australian audit committees which do not regard the information technology and data security factor as very crucial. To an equal extent, the comparison of the Australian and U.S audit committees' oversight priorities clearly demonstrate wide variations.

Besides oversight priorities in the two countries, learning and development is another factor that forms the basis for the comparison between Australian and U.S audit committees. In relation to the United States, Australia has a low number of the hours devoted for external education to the members of the audit committee (KPMG, 2008). On average, the number of hours devoted for the both internal and external education to the audit committee members is sixteen; equal for both internal and external education. On the reverse, significant focus on external education is maintained in the U.S. audit committees. The average devotion of time on both internal and external learning and education by the U.S audit committees is 12 hours for internal education and over 21 hours for the external learning and education programs. Time commitment and committee meetings are other factors considered for the comparison. Variations exist in relation to the number of committee meetings held annually in the two countries. Audit committees in the United States tend to have more meetings than those in Australia. Averagely, the US has 9 meetings annually compared to Australia with an average of 5 meetings annually. As consideration of the technological convenience, the US audit committees hold more face-to-face meetings per year. For instance, directors from the US are more likely to opt for discharge of duties via teleconferencing (3.7 percent) than Australia (0.4 percent).

Considering the number of hours spent by the members of the audit committees in fulfilling their roles in the United Sates and Australia, less time is spent in Australia. In Australia, 90 percent of the members in the audit committee fulfill their duties within 100 hours. This is compared to the United States where only 70 percent of the members in the audit committees can complete their duties within 100 hours (KPMG, 2008). Similarly, there are contrasts in the working of audit committee members on more than one committee. A comparison of the two countries shows that 64 percent of the committee members in Australia serve on more than one committee. On the contrary, 85 percent of the committee members render their services on more than two committees. Audit committee composition is one more comparison factor in the two countries. For instance, the composition of the audit committees in the two countries varies between three to four members. Similarly, in the two countries, the members of the audit committees are regarded as financial experts; possessing high proficiency in financial literacy.

Diagrammatic presentation of audit committee requirements

A framework of an audit committee in consideration of the composition and relation with other parties links all the stakeholders. The diagram depicts the particular elements of an audit committee. The diagram is commonly referred to as the WhatWhoHowDo framework (Cooper & Deo, 2006). The designing of the diagram by a world prowess in corporate governance and board effectiveness was to create ease in audit survey. Every element of the framework represents a broader meaning and relevance. For instance, "what" stands for the committee structure and clarity; "who" describes the composition of the committee; "how" outlines the manner of task performance by the committee and "do" lays a description of what the committee does as far as their main tasks are concerned.

Critical analysis of audit committee's independence and financial expertise

Auditing is an important feature of the industrialized economies for a long period of time. In light of the past poor performance by some renowned corporations such as the HIH and WorldCom, scrutiny of the auditing concerns is imperative (Zahn, Singh & Inderpal, 2008). HIH stands as the biggest corporate collapse to have ever occurred in Australia. Major queries linger in consideration of the collapse of the two corporations: audit committee's independence and financial expertise. HIH once boasted of being the second-largest general insurer in Australia. The company had a net asset $939 million as on 31st June 2000. Amazingly, nine months later, the company was under provisional liquidation with debts ranging from $3.6 and $5.3 billions (Cagan, 2001). Nothing better can exclusively explain the trend than failure in corporate governance, regulation, auditing and poor management decision making. A critical focus into the issues leading to the failure of the company leads to varied causations. However, the context of the audit committee is regarded as one major reason. In spite of its existence, the committee was underutilized. In fact, there was breech on independence of the committee; Geoffrey Cohen acted as Chairman of HIH and the committee. Similarly, there were no meetings between the audit committee and other stakeholders without the presence of the management.

The case of WorldCom collapse presents a similarity in the audit committee's lack of independence. The company culture in WorldCom allowed the top management to take advantage of it; making decisions rife with conflicting interests and without roper controls for the reported earnings. The company maintained improper revenue recognition. The setting up of entity earnings of between $ 374 and $661 million on quarterly basis led to loss of billions of dollars. By the provisions of the Sarbanes-Oxley Act, audit committee independence is of critical significance. The collapse of the two corporations was steered by the absence of audit committee independence (Zahn, Singh & Inderpal, 2008).

Effectiveness of audit committee requirements in Australia and the United States

For the listed companies in Australia and the United States, a distinct relationship exists between the audit committee effectiveness and the choice of high quality auditor. Through use of their local guidelines, there is enhancement of the ACE. The association of ACE and non-audit services (NAS) for the listed companies in the two countries further reveals the effectiveness of the audit committee requirements. The six audit committee characteristics are deemed essential for ACE to be maintained (Braiotta, 2003). The characteristics of the audit committee requirements that result to effectiveness are namely independence, size, activity, charter, literacy and expertise as well as the selection of high quality auditors for the listed companies. In both Australia and USA, there is a positive relationship between ACE and the selection of the specialist auditor. Thus Australia and the USA considered the magnitude of NAS purchases for Australian Stock Exchange (ASX) and the New York Stock Exchange (Wallstreet) respectively. Australia and the USA have similar recommendations for the enhancing audit committee effectiveness. Thus other factors such as varied audit committee framework, diverse market development as well as the cultural factors have impacts on ACE. Above other factors, audit committee independence is regarded the most important factor leading to ACE. It is relatively costly complying to the audit committee recommendations especially for small companies with limited resources. Therefore, independence of the audit committee aids in the location of the limited resources (KPMG, 2008).

An example of a listed company in Australia and analysis of its audit committee

Caltex Australia Limited (CAL) has an established audit committee as set out in the committee charter (CAL, 2009). It is also in regard to the CAL's Constitution. In relation to all the requirements of the audit committee, compliance to the recommendations is of paramount importance. To start with, the role of the audit committee in CAL is clearly outlined. This includes assisting the Board in fulfilling integrity to shareholders, approval of the extent of duty for external audit plan and conditions and addressing the appropriateness of the CAL's accounting policies, risk practices on financial risks and integrity of the financial reports. In terms of the responsibilities of the committee, advisory role is major. However, the role includes various functions. They include: integrity in reporting, financial risk management and appropriate compliance to corporations Act, external and internal auditors monitoring.

Most importantly, CAL's audit committee has a clearly spelt membership and attendance. The committee is supposed to comprise of 3 non-executive directors, besides the Board Chairman, appointed by the Board. The members of the committee are independent directors. Similarly, the chairman is an independent director appointed by the Board. As requested by the chairman, members of the senior management should attend all or part of the committee meetings. Skills and competences of the committee members are essential. CAL's audit committee has to possess diverse perspectives and skills on different matters such as understanding of financial statements, financial management qualifications and competences by at least one member and in-depth understanding of the industry operated by CAL by any of the member. Meetings with external and internal auditors are as approved by the committee chairman in absence of the management. At least 2 members can hold a meeting which should not be less than four times in a year.


The accountability of corporate financial reporting highly depends on the role played by the audit committee. The structure, composition and operation of the audit committee are essential towards the maintenance of effective performance. An independent audit committee can yield very positive results to an organization. Conversely, absence of independence by the committee puts the process of financial reporting in jeopardy. ACE is thus as a result of adequate provision of critical freedom and enhancement.