Transcript AUDIT COMMITTEES

AUDIT COMMITTEES
COMPOSITION, MANDATE AND OPERATION
MARE-LISE FOURIE
(FIMFO)Honorary life member
CONTENT
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SECTION
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5
INTRODUCTION
WHY?
WHAT?
HOW?
CONCLUSION
SECTION 1
INTRODUCTION
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Local Government Transition Act
Second Amendment Act, 1996 (Act
97 of 1996)
New legislation
SECTION 2
WHY DO WE NEED AUDIT
COMMITTEES?
2.1 Governance requirements
 Any organisation is defined by its
purpose. For a municipality it is most
likely to be the provision of the
highest level of services to the
community it serves in a sustainable
way and at the most
economical
rate.
2.1 Governance Requirements
(Cont)
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Objects of local government –
Section 152 of the Constitution
Provide democratic and accountable
government
Ensure the provision of services to
communities in a sustainable way
2.1 Governance Requirements
(Cont)
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Governance represents the means by
which direction and control are
applied to stewardship of an
organisation’s assets – tangible and
intangible, financial and non-financial
- in the pursuit and delivery of the
primary objective of sustainable
value creation
2.1 Governance Requirements
(Cont)
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Governance is therefore essentially a
function of –
Leadership and direction
Appropriate risk management and
control
The manner in which meaningful
disclosure is made
2.1 Governance Requirements
(Cont)
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Seven primary characteristics of good
governance: King Report 2002
Discipline
Transparency
Independence
Accountability
Responsibility
Fairness
Social responsibility
2.2 New Legal Requirements
Local Government: Municipal Finance
Management Act, 2003 (Act 56 of
2003)
Section 166:
 Establishment
 Duties
 Requirements
 Composition
SECTION 3
WHAT IS AN AUDIT COMMITTEE?
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Definition
An audit committee is an
independent advisory body
appointed by a council and tasked
with specific responsibilities as set
out in an audit committee charter
approved by a council
What is an audit committee?
(Cont)
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Content of an audit committee charter:
Objectives
Functions and responsibilities
Authority
Organisational requirements
Reporting requirements
Relationship with council, management
and internal and external auditors
3.1 What are the objectives of an
audit committee?
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To assist the council in fulfilling its
oversight responsibilities
To review:
Financial reporting process
System of internal control and
management of financial risks
Audit process
Compliance
To maintain effective working relationships
with council, management, auditors
3.2 What are the
duties/responsibilities of an audit
committee?
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Key performance areas:
Financial reporting:
- Timely, objective and complete
disclosures
- Financial position
- Results of operations, plans and
long-term commitments
Key performance areas (Cont)
Corporate governance:
• Compliance
• Ethics
• Effective and efficient control
systems to prevent fraud, etc.
Governance by an audit committee
implies oversight not management
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Key performance areas (Cont)
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Corporate control: This includes control
over key financial and operating risk areas
and systems of internal control
Objectives of internal control:
Reliability and integrity of information
Compliance
Safeguarding of assets
Economical, effective and efficient use of
resources
Performance management
Legislated duties of an audit
committee
Section 166 of the MFMA:
 Advise on matters relating to the following:
 Internal financial control, internal audits
 Risk management
 Accounting policies
 Adequacy, reliability and accuracy of financial
reporting and information
 Performance management
 Effective governance
 Legislative compliance
 Performance evaluation
 Other
Legislated duties of an audit
committee (Cont)
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Review AFS with regard to the
following:
Financial position
Efficiency and effectiveness
Compliance
Respond to issues raised by the
Auditor-General
Investigations
3.3 What is the authority of an audit
committee?
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To obtain/seek/gather information
from internal or external sources
To request/obtain outside legal or
other professional advice
To ensure attendance of
officials/councillors
To initiate special investigations
SECTION 4
HOW DO AUDIT COMMITTEES
OPERATE?
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Organisational arrangements
New member orientation
Reporting responsibilities
Evaluating the performance of the
audit committee
Building better working relationships
4.1 Organisational arrangements
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Appointment of committee members
Size of committee
Membership requirements
Term of office
Remuneration of members
Attendance of officials
Arrangements for meetings
4.1 Organisational arrangements
(Cont)
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Appointment of members:
Majority of members not in the employ of
the municipality
No councillors
Chairperson – not employee
Size of the committee
Large enough to represent a balance of
views but small enough to operate
efficiently
Size of the organisation to determine – 3
to 6
4.1 Organisational arrangements
(Cont)
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Membership requirements:
Critical success factor for
performance
Accounting or related financial
management expertise
Legal background
Ability to read and understand basic
financial statements
Membership requirements (Cont)
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Qualities that each member should possess:
Integrity
Independence
Dedication of time and energy
Understand local government business, risks and control
Knowledge in financial matters
Good communication skills
Inquisitiveness and independent judgement
Chairperson should possess strong leadership qualities and
ability to promote effective working relationships
Term of office of members
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Normally varies between 1 and 3
years
When considering – weigh following
considerations:
Continuity
Freshness
Staggered terms to balance above
considerations
Remuneration of members
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Compensate members not in
employ:
Re-imbursement of expenses
Negotiated fee per hour
Tariffs applicable to the Office of the
Auditor-General
Attendance by officials and other
parties
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Standing invitation:
Accounting officer
Chief Financial Officer
Internal auditor
External auditor
Representative of the Office of the
Auditor-General
Other person or employee
Meetings
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Number of meetings:
At least four times per year
Actual number influences by objectives
and scope of activities
Generally correspond with major phases of
financial and performance reporting and
external and internal audit cycles
Agenda
Quorum
Secretarial functions
Minutes
4.2 New member orientation
New committee members should be provided with sufficient
Information and training with regard to at least the following:
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Audit committee charter
Municipality’s financial and operational controls
Accounting policies
Municipal operations and areas of risk
Background and qualifications of senior executives and
financial management
Responsibilities of the internal audit function
Internal audit plan
Scope of external audit
4.3 Reporting responsibilities
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Duty to report to council on the
following:
Summary of committee activities
Relevant recommendations
Matters that impact on the financial
condition os the municipality
Matters that impact on the affairs of
the municipality
4.4 Evaluating the performance of
the audit committee
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Done through self assessment with inputs from
management and internal and external audit teams
Chairperson to evaluate performance of individual members
Council to evaluate performance of chairperson
Evaluation criteria:
Expertise and know how
Attitude, objectivity, judgement and independence
Understanding of and commitment to duties
Attendance of meetings
Timely responses
Knowledge of municipality and its objectives
Corrective steps if required
4.5 Building better working
relationships
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Effective oversight requires the audit
committee to ask difficult questions
and expect reasonable answers
A strong working relationship can be
established by the following:
Developing and maintaining a code
of conduct
Encouraging ongoing
communications
SECTION 5
CONCLUSION
‘In the context of corporate
governance, a proper balance needs to
be achieved between the freedom to
manage, accountability and the
interest of different stakeholders’
The King Report
CONCLUSION (Cont)
‘The mere existence of an audit
committee is not enough. The audit
committee must be vigilant,
informed, diligent and probing in
fulfilling its oversight responsibilities’
Report of the National Commission on
Fraudulent Financial Reporting
(Treadway Commission)
CONCLUSION (Cont)
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An audit committee should never be
seen or treated as a necessary evil
but rather as a trusted ally
Its greatest virtue is its
independence which allows it to
challenge management decisions and
evaluate corporate performance from
a completely free and objective
perspective
THANK YOU