Auditing Committee Essay Example | Topics and Well Written Essays - 1000 words

Auditing Committee - Essay Example Audit Committees Introduction An audit committee can be defined as a committee that generally comprise of non-executive directors and is responsible for liaising between the board of directors and the external auditors (Parker, 1992). The responsibilities of audit committee encompass matters related to audits, financial reporting and internal control (Spira, 1998). Because of the importance of audit committees, major stock exchanges across the world such as US, UK, Canada, India, France, Australia, Honk Kong, Japan and Germany have given significant importance as a part of their listing requirements. Audit committees started from the US and percolated to other countries of the world. Audit committee of an organization is expected to perform the following activities: Make recommendations in the area of external auditor to the Board of Directors. These include selecting the external auditor, deciding the audit fees, renew/terminate the contract with the external auditor, decide the sco pe of work done by external auditor and other liaising activities between the external auditor and BoD. ... r major contributions that an audit committee can make to the corporate governance of an organization are (Cobb, 1993): Reduction of board liability Establishing a link between the external auditor and the board Reduction of illegal activity and Proper representation of the financial statements Besides these, audit committees also reduce the agency cost of an organization. This is achieved by reduction in the information asymmetries between executive and non-executive directors (Eichenseher and Shields, 1985; Pincus et al., 1989). Audit committees also lead to reduction in the legal liability of the directors. Audit committees also help the process of corporate governance by: enabling BoD to meet their responsibility; improving auditor independence (Bradbury, 1990); and strengthening the role of non-executive directors (Porter and Gendall, 1998). Audit committees ensure that the external audit has performed its job well. At the same time they are also responsible for ensuring the rel iability of the internal audit processes. This aspect of the audit committee will strengthen the overall audit process and positively impact the corporate governance of the organization. Audit committees also lead to generation of wealth for shareholders. This is based on the premise that non-executive directors are more likely to act in the interest of the shareholders (Rosentein and Wyatt, 1990). Limitations of audit committees Although audit committees play a very pivotal role in managing the corporate governance of an organization, there are certain areas which do not fall under the preview of the committee. An audit committee is not responsible to plan and conduct audits. At the same time, an audit committee is not responsible to determine if the company’s financial statements are