What Is an Audit Committee?

An audit committee is one of the major operating committees of a company's board of directors that is in charge of overseeing financial reporting and disclosure. All U.S. publicly-traded companies must maintain a qualified audit committee in order to be listed on a stock exchange. Committee members must be made up of independent outside directors, including a minimum of one person who qualifies as a financial expert.

How an Audit Committee Works

Audit committees maintain communication with the company's chief financial officer (CFO) and controller. The committee also has the authority to initiate special investigations in cases where it is determined that accounting practices are problematic or suspect, or when serious issues arise with employees. An internal auditor would assist the committee in such efforts.

Important

The audit committee's role includes the oversight of financial reporting, the monitoring of accounting policies, the oversight of any external auditors, regulatory compliance and the discussion of risk management policies with management.

The duties and composition of a company's audit committee can be found in SEC Form DEF 14A, or proxy statement. Committee members may change from time to time, depending on the movement of personnel on or off the board or change of committee assignments. An audit committee will meet in person at least quarterly and on an ad-hoc basis in person or via telecommunications. Aside from annual compensation for directors, those who serve on an audit committee (the same applies for all committees) are paid for each meeting attended.

Audit Committee Hazards

The audit committee must take its responsibilities very seriously. Financial reporting, compliance and risk management are subject to a number of hazards, especially when the company is a large organization with thousands of personnel and reporting systems stretching across the globe. Exogenous threats such as cyber hacking are under the purview of an audit committee, making its job even more challenging. Cybersecurity should be an increasing focus for audit committees in corporate boardrooms everywhere.