1 Unit 4 - Audit Committees and their Potential Lessons for The Public Accounts Committee
2 Crown Corporation/State Owned Enterprise Audit Committees A corporate governance committee made up of a sub set of members of a crown Corporation s Board of Directors, and Senior Management. The business focus is on the financial reporting, risk management, internal control, and the legislative, regulatory, and policy compliance, areas of the organization. The committee is seen as an integral part of an organization s overall governance system. They operate as an advisor and intermediary between the Board of Directors, the executive, and the external and internal auditor, and executive management. They are similar to private sector audit committees.
3 Departmental Audit Committees Similar to Crown Corporation Audit Committees except that the members are made up of a majority of independent members from outside the department, the deputy minister, and a few key senior executives. Normally an external (independent) member is the chair. The responsibilities are essentially the same as that for a Crown Corporation Committee but the committee is intended to provide advice to the Deputy Minister. In the Canadian Federal model, the independent members also meet with the Minister and have a duty to resign if they have significant concerns with the department.
4 Audit Committees-Principal Responsibilities There are three principal responsibilities: Oversight of the Financial Reporting Process and other financial information disclosure Oversight of the organizations risks and system of internal control Oversight of the internal and external audit processes.
5 Importance of Audit Committees They are an effective response to past organizational issues e.g. Enron, and World Com. They help the Board of Directors or Deputy Minister better do their job e.g. organizational leadership, stewardship, responsibility, and accountability. They bring focus to the financial, reporting and control systems of an organization. You want to be assured that government organizations are well managed and provide accurate and relevant financial and performance information.
6 Transformation of Audit Committees (From CICA Integrity in Spotlight) Old Committees Dominated by Mgmt Reactive Underutilized Not empowered Lacking courage Little involvement in member selection Dealt with external auditor through Mgmt New Committees Much more accountable Increasing expectations Pro active Focused on relationships Candid and direct communication Financially literate Demanding and Courageous
7 The Role of the Audit Committee (From Prov. of B.C. Audit Committees doing things right.) Audit Committees today now have a much broader mandate: Internal and External Audit. Financial and non-financial performance management and reporting. Systems of Internal Control. Compliance with legislation, ethics and codes of conduct. Risk management.
8 Audit Committee Membership As noted earlier, the majority of an audit committee, for objectivity, is to be independent of the organization. The, members also need to be free of conflicts of interest to ensure they provide the best advice they can. Public Accounts Committees are normally made up of government and opposition members. A challenge in the committee, therefore, is to avoid partisan debate and to make recommendations in the best interests of the citizens. PAC members must also be free of potential conflicts of interest.
9 Audit Committee-Member Skills The skill requirements for PAC and audit committee members are quite similar. They must be: Financially literate or have access to financial skills. Understand the organization s business, risks/opportunities, and accountability structures. Prepared to devote the time necessary to be an effective member e.g. attendance at all meetings. Understand the financial statements and the reports from internal and external auditor. Able to ask the difficult questions of Management.
10 Audit Committee-Member Changes Departmental or Crown Corporation Audit Committee, members are rotated to maintain a fresh perspective and to maintain objectivity. The chair and the members normally serve for 3-4 years and are gradually replaced to ensure continuity over a planned period. You also need to consider how to maintain the appropriate mix of member skills. For the PAC you also need to preserve objectivity and the right skills, but must ensure there is so much change as to threaten continuity and understanding.
11 Making Committees Effective For audit committee effectiveness there are four main areas to focus on: 1. Committee Structure and Operation; 2. Oversight of Financial Reporting; 3. Working with the Internal and External Auditors; and 4. Ensuring compliance with applicable laws, regulations and policies. For the PAC the areas to focus on are largely the same except that the Committee structure is usually a given, and there is much less interaction with internal audit, as they work for management.
12 (1) Structure and Operation For Audit Committees, an effective structure and operation includes: Member independence-initial review/annual sign off. Financially literacy- At least one member expert in governance & financial reporting/accounting. Charter and a Calendar to guide the committee. Orient members to organization and train them. Meet regularly throughout the year e.g. Quarterly. All of these essentially apply to PACs except member independence policy.
13 (1) Structure and Operation-Cont d Take committee minutes and track and follow up items requiring action. Chair sets the agenda in consultation with Management and other members. Committee meetings to coincide with organizational calendar of events e.g. Director meetings. Report on your activities, issues, and opportunities, and make recommendations. At least annually, review performance of the committee members and the committee as a whole. Again many of these can apply to the PAC.
14 (2) Financial Reporting Oversight An Audit Committee s review would include: Financial reporting processes and overall integrity of the information. Organizational and business risks and the sate of the internal control systems. Obtaining reasonable assurance that controls exist to manage the significant risks identified. Reporting on the effectiveness of the internal controls and any control weaknesses. Review quarterly and annual financial statements.
15 (2) Reporting Oversight-Cont d In contrast, the PAC responsibilities for financial reporting oversight would generally include: Review of annual government financial statements prepared by the government. Presentations by Comptroller General (the preparer) and by the Auditor General (Auditor General). Discussion/review of accounting policy and other issues and their resolution. Review of Auditor General recommendations and possibly recommending them to parliament.
16 (3) Working With Auditors For Departmental or Crown Audit Committees: Manage external auditor relationship-independence, hiring, compensation, and reviewing performance. Review of Financial statement audit plan and plans for other audit engagements. Review audit issues and management responses. Review/direct the work of internal auditor-internal audit plan, performance, audit resources and reports. Ensure Management has follow up process for issues. Regular meetings including In-Camera with auditors.
17 (3) Working with Auditors Cont d For Public Accounts Committee: Focus is on working with the external Auditor or Auditor General as internal auditor works for Management not the committee. PAC working with the Auditor General may include: review of financial and other audit plans, review of the auditor General budget, review and recommend action per Auditor General reports and as required meet in camera with the Auditor General. PAC to preserve the independence of Auditor General.
18 (4) Review of Compliance Management has primary responsibility to abide with laws etc. Audit committees and PACs, however, needs to monitor: 1. Compliance with applicable legislation, regulations, and public sector reporting requirements. 2. Compliance with internal policies, including Standards of Conduct, and Conflict of Interest. 3. Whistle Blower policies and procedures 4. Management should provide compliance reports 5. Committees may discuss issue with the auditors.
19 Audit Committee Resources To be effective Audit Committees and Public Accounts Committees need some resources to do their job. Resources are needed for committee operations e.g. secretarial support, travel and other operating costs such as preparing and releasing their reports. To preserve independence and objectivity there also should also be some resources that the committee can use at its discretion to pursue its review activities. Committees need access to research staff as well as external consultants/experts.
20 Role of Audit Committee Chair For both DACs and PACs the chair (& vice chair) play and important role in making the committees effective: Setting an agenda in co-operation with Management and ensuring required information is brought forward. Follow up issues with management issues from previous meetings. Keep the committee on track. Report on committee s business. Principal liaison and communication channel.
21 Role-Audit Committee Member The role of a PAC and Audit Committee member are also similar: Identifying training needs and receiving training. Preparing for audit Committee meetings in advance. Full participation in setting committee agenda, charter, calendar and committee reports. Active participation in the meeting itself to ensure all topics are thoroughly covered. Be prepared to ask the right questions. Speak primarily through the chair.
22 The Federal Government of Canada Initiative Part of strengthening the Federal financial function consistent with the Accountability Act. Departmental audit committees are seen as an essential part of the audit regime. Deputy heads to establish independent audit committees. Policy initially took effect on April 1, (It is to be reviewed by 2009). There is to be some phase-in of requirements e.g. moving away from department heads as chair.
23 Federal Audit Committee Mandate and Responsibilities Overall Mandate: The Audit Committee shall ensure that the deputy head has independent objective advice and guidance and assurance on the adequacy of the department s control and accountability processes.
24 Federal Audit Committee Mandate and Responsibilities-Cont d General Responsibilities: Values and Ethics-Review of departmental policy and the application of values and ethics. Risk Management-Annual review or corporate risk profile and risk management arrangements. Management Control Framework-Annual review of internal control arrangements and adequacy of management led audits.
25 Key Tasks Audit Committee to Perform The Canadian Federal guidelines for it s Audit Committees closely parallel the requirements of audit committees generally: Review of internal audit, its resources, plans, structure, etc. Follow up on Internal audit and other audit reports to see that recommendations are implemented. Work with the external auditor and the Comptroller General. Review the risk management system and corporate risk profile. Prepare annual report to the deputy minister on activities, concerns etc. Duty to resign if issues raised are not satisfactorily dealt with. In-Camera meetings with Chief Financial Officer, internal audit and Auditor General, as well as meeting with Comptroller General.
26 Fostering An Effective Relationship Responsibilities of Departments: Clear understanding of the committee s role and responsibilities. Strong support for the work of the committee from the top and throughout the organization. Prompt and appropriate attention paid to the issues raised and advice from the committee. Open and candid flow of information. Regular meetings and proper resourcing. Respect and trust in the committee.
27 Fostering An Effective Relationship Responsibilities of the Audit Committee: Provide independent and objective advice in best interests of the organization. Understand the business of the Department and its challenges. Effectively draw on, and apply the committee members expertise and experiences. Offer constructive and timely advice. Recognize that progress will take time. No surprises!!!
28 Implementation Issues There are a number of issues which arise in the setting up of an Audit Committee or PAC. They include: 1. Lack of support or training for the initiative. 2. The wrong people on the committee e.g. conflict or no financial expertise. 3. No resources for the committee. 4. Poor relationship with auditors (internal/external) 5. No understanding of proper roles e.g. auditor independence or trying to do management s job. 6. Insufficient focus and not asking right questions.
29 Review of Tools Terms of Reference and Charter. Pre set meeting dates and a committee plan for the year. Annual committee and member evaluation. In-camera meetings. The Audit Committee Secretariat. Clear conflict of Interest rules. The right members!!!!
30 Sample Questions Of Chief Executive Officer/Deputy Minister (Permanent Secretary): What are the principal risks you are facing and how are you addressing them? How do you know your financial control system is working effectively? What do you personally do to reinforce an organizational culture of openness, transparency, and accountability? Of Chief Financial Officer: (Some In-Camera) Were there any instances of fraud or a breakdown in controls? How were they resolved?
31 Sample Questions-Cont d What accounting policy changes were made and why? What are the significant judgements behind the accounting estimates? Of the External Auditor/Auditor General: (Some in-camera) Was the scope of your work limited in any way? Do you have any concerns re: financial staff? What were the major items on your proposed adjustment list? What should we have asked that we did not ask you?
32 Summary/Conclusions Audit committees are an integral part of an overall effective governance system as they provide an independent view. The strength of the committee lies in its independence and its expertise as well as in its relationship with the auditor and deputy head. Audit committees should be seen as a tool toward better performance as opposed to simply a watchdog. The free flow of candid information is essential. The Audit Committee cannot do it alone. The audit role will continue to evolve.
33 References: Treasury Board of Canada Secretariat-Directive on Departmental Audit Committees. Province of British Columbia Audit Committees: Doing The Right Things. Auditor General of Alberta, Assessment of the Performance of Public Sector Audit Committees. Auditor General of Manitoba-Enhancing Audit Committee Practices in the public sector. http//www.oag.mb.ca/reports
34 References Cont d KPMG s Audit Committee Institute (ACI)-Canada, Shaping the Canadian Audit Committee Agenda. HM Treasury U.K., The Audit Committee Handbook, treasury.gov.uk/media/8d2/62/audit committee handbook2003.pdf American Institute of Certified Public Accountants (AICPA), Audit Committee Toolkits,
35 Questions/Contacts Questions? Contact Information: Arn van Iersel, FCGA