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.

Key Takeaways

  • An audit committee is made of members of a company's board of directors and oversees its financial statements and reporting.
  • Per regulation, the audit committee must include outside board members as well as those well-versed in finance or accounting in order to produce honest and accurate reports.
  • Committee members must sign off on the company's books and take responsibility for any misreporting.

How an Audit Committee Works

The audit committee works closely with auditors to ensure that company's books are correct and that no conflicts of interest exist between auditors or any outside consulting firms employed by the company. Ideally, the chair of the audit committee will be a Certified Public Accountant (CPA). Often, however, a CPA is not available for the audit committee, let alone a member of the board of directors. The New York Stock Exchange (NYSE) requires that the audit committee include a financial expert, but this qualification is typically met by a retired banker, even though that person's ability to catch fraud may be less than expert. The audit committee should meet at least four times a year in order to review the most recent audit, either in-person or via teleconferencing. An additional meeting should be held if other issues need to be addressed.

Audit committees maintain communication with the company's chief financial officer (CFO) and controller. The committee 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.

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. Aside from annual compensation for directors, those who serve on an audit committee (the same applies for all committees) are paid additionally 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.