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The Sarbanes-Oxley Act determines that the audit committee, rather than management or the full board of directors, is directly responsible for appointing, compensating, and overseeing external auditors. The responsibility of the audit committee means that it is smart to periodically assess their effectiveness using a self-evaluation.
Reasons to assess
Companies listed in the New York Stock Exchange are required to perform an annual self-evaluation. It is recommended by the American Institute of Certified Public Accountants (AICPA) that all companies, including not-for-profit entities and private firms, complete a self-evaluation. In general, this evaluation serves to make your audit committee more effective at assessing fraud risks and evaluating both internal and independent auditors.
Some specific benefits of self-evaluation include:
- Improving audit committee performance
- Promoting candid discussions
- Identifying practices and procedures to conduct more effective meetings
According to the AICPA’s Audit Committee Effectiveness Center, common methods of self-evaluation include:
Introspection: Committee members, and often the board chair, perform an evaluation by answering specific questions about the committee’s impact on the financial reporting process and its relationships with management and internal and independent auditors.
Performance improvement: The chief audit executive, CFO, CEO, and independent auditor are asked to comment on the committee’s performance.
360-degree: Each committee member (including the chair) evaluates all other members of the team. To avoid alienating committee members, consider beginning the process by evaluating the overall performance of the committee and then looking into individual performance reviews.
Competence: The committee, others within the company, or an outside evaluator assess the financial literacy of the members of the committee. Evaluations include but are not limited to recent training on enterprise risk management, accounting, auditing, financial reporting developments, and current business and industry practices.
Leadership: Committee members discuss the committee chair’s performance, communicating any concerns to the board chair of the corporate governance committee.
No matter the method, remember this process is intended to focus on improvement and not just highlight weaknesses.
We can help
Maximizing the benefits of audit committee self-evaluations requires careful planning. We can help build an effective self-evaluation design for your company’s specific needs.
Contact us at 949-860-9902 or click here, and we will contact you.