Role of The Audit Committee

4.
20 Auditor Admiration
The audit committee’s role is one of oversight and monitoring, and in carrying out this
responsibility, the committee may rely on management, the independent auditor, and any
advisers the committee might engage, provided its reliance is reasonable. The audit committee
should consider having management identify and discuss any significant accounting policies,
estimates, and judgments made. A quarterly analysis of these areas may be useful to prepare for
these discussions, and management should tailor the analysis to highlight changes and include
new or unusual items.
The audit committee is also required to review management’s analyses of significant issues in
financial reporting and judgments made in preparing the financial statements, including the effects
of alternative GAAP methods. This discussion may also be held during the review of the quarterly
financial statements. The audit committee also should review the effects of regulatory and
accounting initiatives, as well as of balance-sheet transactions, on the financial statements. For
example: • Management and the audit committee should discuss pending technical and regulatory
matters that could affect the financial statements, and the audit committee should be updated on
management’s plans to implement new technical or regulatory guidelines. • The review of off-
balance-sheet structures should also be a recurring agenda item, and may be conducted as part of
the committee’s review of management’s discussion and analysis in the annual and quarterly
reports. The exact frequency of these discussions will depend on the company’s operations and
preferences. Finally, the audit committee should consider reviewing off-balance-sheet
transactions, or at least material ones, before they are executed.
Fraud risk In conjunction with risk oversight, the audit committee should be satisfied that the
company has programs and policies in place to prevent and identify fraud. It should work with
management to oversee the establishment of appropriate antifraud controls and programs and to
take the necessary steps when fraud is detected. The audit committee should also be satisfied that
the organization has implemented an appropriate ethics and compliance program and established
a reporting hotline. See the ethics and code of conduct and reporting hotline procedures sections
later in this guide for more information
Audit committee members should be aware of three main areas of fraud risk: • Financial
statement fraud, which includes intentional misstatements in or omissions from financial
statements • Asset misappropriation, which may include check forgery, theft of money, inventory
theft, payroll fraud, or theft of services • Corruption, which may include schemes such as
kickbacks, shell companies, bribes to influence decision makers, or manipulation of contracts. One
way the audit committee can help oversee the prevention and detection of financial statement
fraud is by monitoring management’s assessment of ICFR. The audit committee should also have
an awareness of the US Foreign Corrupt Practices Act (FCPA) and other non-US anticorruption laws
that may be applicable (e.g., the UK Bribery Act). As the SEC and Department of Justice note in the
Resource Guide to the FCPA, anticorruption compliance “begins with the board of directors and
senior executives setting the proper tone for the rest of the company.” To that end, the audit
committee should: • Understand the company’s obligations and responsibilities regarding
anticorruption laws to which it is subject • Determine whether the company has dedicated
appropriate oversight, autonomy, and resources to its anticorruption compliance program;
depending on the company’s size, this could involve assigning an individual who is specifically
charUnderstand specific policies and procedures in place to identify and mitigate corruption-
related risks • Discuss with management specific corruption-related risks that have been
identified, including allegations of corruption that may have been received through the company’s
monitoring and reporting mechanisms, as well as management’s plans for responding to such risks
• Monitor any actual violations, including management’s response.

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