Chapter 2 - Audit Matters

Abstract

Audit committees have become an important aspect of corporate governance in recent years, partly as a result of the recommendations set out in the Combined Code but also because companies have begun to appreciate the benefits that an effective audit committee can bring in terms of providing additional assurance on the adequacy of the company's system of internal control and on the quality of its financial information and of its financial decision-making. Although the Combined Code applies primarily to listed companies, the principles underlying the recommendations apply to every company and all directors are therefore encouraged to follow them. The recommendations are equally relevant for not-for-profit organizations, particularly where there is a high degree of public interest in their activities, for instance charities and public sector bodies. Membership of the audit committee is a critical issue – any committee can only be as good as the people that serve on it. In particular, the effectiveness of the audit committee often depends on a strong, independent chairman who has the confidence of both the board and the external auditors, and on the quality of the non-executive directors. The size and complexity of the company, and the size of the board of directors, will usually have a direct bearing on the size and membership of the audit committee.