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Audit committees are essential for ensuring integrity

08 December 2017 by Bernadette Barber

Audit committees are essential for ensuring integrity - Read more

The committee’s value to reporting has stood the test of time

December marks the 25th anniversary of the publication of the Cadbury report, which many consider to be the starting point for modern corporate governance.

Many of the governance ideas espoused in that report remain familiar to us today, including the requirement to establish an audit committee featuring only independent non-executive directors (NEDs).

Although not unheard of in 1992, the audit committee was not universally found across large organisations at the time.

Contrast that to now, where establishment of an audit committee is considered an essential control, not only in the listed sector, but also in larger private businesses, charities and public sector bodies worldwide. The influence of the Cadbury Report in that regard cannot be underestimated.

For companies with a 31 December financial year end, the audit committee will be turning its thoughts to its key responsibility: ensuring that the audit of the annual report and accounts is adequate and that the narratives and financial statements produced offer readers a fair view of the financial performance of the business over the past year and of the prospects of the organisation going forward.

As anyone who is involved in the preparation of the report and accounts knows, it is an unenviable task.

The document is long and complex, must meet the expectations of many different audiences and comply with a variety of reporting standards and guidelines. The content must be accurate, meaningful, readable, consistent, not excessive, and accompanied by pretty pictures and innovative infographics.

“It is less of a wonder to me that some companies fail to meet high expectations than the fact the majority do”

And all this is typically achieved in a pressured timescale, and with the threat of censure and sanctions for those who get it wrong. The problems in the process are considerable. It is less of a wonder to me that some companies fail to meet these high expectations than the fact the majority actually do.

The company secretary is often a bridge between the many parties involved in the annual report and accounts project, and is also a key support to the audit committee.

Although tasking independent non-executives to provide oversight of the processes and controls and to review the disclosures is in itself a protection, the limited day-to-day involvement of non-executives means that they approach their responsibilities from a disadvantage in terms of their in-depth knowledge of the business.

They are expected to challenge, test and question effectively, while lacking the detailed information that executives take for granted.

This is a dilemma that many company secretaries may feel they can identify with.

Playing a central role within the business, and often called upon to participate in initiatives that encompass operational or other support areas in which they have no immediate involvement, the company secretary is frequently required to bring expertise and input to issues outside of their direct experience.

To that extent, the positions of the company secretary and the NEDs are in some ways similar. Being able to understand and be mindful of the difficulties of that type of scenario can be helpful in thinking about how best to support the audit committee.

This thinking should not just cover what information is provided, but also how and when it should be presented and by whom.

For example, preparatory briefings well in advance of the review work itself can help ensure the committee approaches its role with adequate knowledge and background information as context to enable effective oversight.

Being deeply involved in the annual report and accounts preparation and also coordinating related activities, such as the annual general meeting, at the same time, sometimes the company secretary may lose sight of audit committee planning, seeing it as a bridge that can be crossed once the more urgent issue of getting the year-end documents into decent shape is more advanced.

Although cognisant of the benefits themselves, they may struggle to engage other colleagues in such advance planning when those co-workers are already struggling with the immediate demands of urgent drafting and audit deadlines.

We should remember that those Cadbury recommendations, despite being refined over the last quarter of a century, have stood the test of time for a reason.

The additional assurance on integrity of the financial statements provided by the audit committee is vital. Accordingly, its planning should not be put on the backburner until the last minute – it is worthy of ongoing consideration and focus.

Bernadette Barber FCIS is director of company secretarial consultancy, Chadwick Corporate Consulting

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