What are the Responsibilities of the Audit Committee?

Before you tackle the year-end financial report, it’s a good idea to review the role that independent audit committees have when it comes to giving investors and markets high-quality, reliable financial information.

What Does the SEC say?

The Securities and Exchange Commission (SEC) regulations state that all public companies must have an audit committee. This role can be filled by an independent group or by a full board of directors. Also, many not-for-profit entities and large private companies have created audit committees to guide the financial reporting process and reduce the risk of making a financial misstatement. 

SEC leadership recently issued a joint statement about audit committees, and it highlights the following critical areas of focus:

Is the tone of your report productive? Audit committees set the tenor for the company’s financial reporting and, more importantly, the relationship with the independent auditor. The SEC statement encourages audit committees to be proactive in all their communication with auditors. The SEC also encourages companies to understand the process for resolving issues with the audit committee.

Is your auditor independent? Ensuring the independence of any auditor is the shared responsibility of the audit firm, the company, and its audit committee. The SEC statement further suggests that audit committees take into consideration any corporate changes or other events that could affect the independence of the auditor.

How does GAAP affect the audit? The audit committee is charged with helping management comply with current GAAP policies. It is essential for audit committees to apply significant new accounting standards that were adopted in recent years. These standards include the new lease and credit loss rules as well as revenue recognition.

What are the internal controls over financial reporting (ICFR)? Another responsibility of audit committees is overseeing ICFR. The SEC confirms the importance of remediation of any material weaknesses and following through to make sure those changes are effective.

Are you keeping communication clear and open? Open communication between audit committees and external auditors throughout the audit reporting process is crucial. Focusing on such issues as accounting policies and practices, estimates, and significant or unusual transactions are strongly recommended by the SEC statement and will strengthen communication.

Which non-GAAP measures may affect your report? These metrics, when combined with GAAP measures, can provide helpful information to investors when making critical decisions. The SEC suggests audit committees assess how management uses these metrics to evaluate performance. The committee should also determine whether they’re consistently prepared and presented from period to period.

Are you up to date on the reference rate reform? It is essential to recognize that the dissolution of the London Interbank Offered Rate (LIBOR) may create a risk for companies with contracts that reference LIBOR. The SEC also encourages audit committees to understand the company management’s plan to deal with the risks associated with reference rate reform.

Are you ignoring critical audit matters (CAMs)? CAMs are material accounts or disclosures that require the auditor to make a difficult decision or use complex judgment. Beginning in 2019, auditors are required to disclose CAMs for certain public companies within the auditor’s report. The SEC statement reminds audit committees to understand and review the nature of each CAM. The committee should know the auditor’s reason for determining it and how it will be described in the auditor’s report.

Let’s Work Together

Collaboration between the audit committee and external auditors is critical, regardless of whether a company is publicly traded or privately held. If you have questions about the audit committee’s role in this process, JLK Rosenberger can help. Click here to contact us or call us at 818-334-8645 with any questions you have regarding the financial reporting process.