Reflections on what makes for an effective audit committee, based on 20+ years of experience, delivered to an audience at Abu Dhabi Center for Corporate Governance in January 2014.

1. REFLECTIONS ON THE ROLE OF THE AUDIT
COMMITTEE (HIGHLIGHTS)
Presentation to Abu Dhabi Centre for Corporate Governance (January 2014)
For a copy of the full presentation please contact Peter Chambers (peter.chambers@bdo.ae)

2. Page 2
REFLECTIONS ON THE ROLE OF THE AUDIT COMMITTEE
Structure
The Whys The Whos The Whats The Whens The Hows

3. Page 3
THE WHYS
Why are audit committees so important to an
organization’s overall corporate governance?
• Increasing occurrences of financial debacles and actual or alleged
fraudulent activities mean large and small companies have a greater
need for independent oversight
• The “tone at the top” is a key element of an organization’s control
environment
• For an audit committee to exercise proper oversight it must influence
the “tone at the top”

4. Page 4
THE WHYS
Why should a private company consider forming an
audit committee?
• Contributes to better financial results
• Easier access to capital
• Better decision making in terms of accuracy and quality of financial
reporting
• Able to build stronger relationships with stakeholders
• Facilitates better transitions in leadership
• Easier entry to public capital markets
A company with an established governance body becomes even more attractive to risk-adverse
lenders, investors and potential buyers.

5. Page 5
THE WHOS
Who are the key participants in the marketplace?
• Internal (oversight boards,
directors, financial and
operational management,
internal auditors, external
auditors, legal advisors)
• Regulators, standard setters
and financial analysts
• Shareholders, investors and
suppliers
• Media
The Audit Committee, in its oversight role, is at
the centre of this, charged with fostering the
appropriate “tone at the top”.

6. Page 6
THE WHOS
Who make the best audit committee members?
Independent
and
Financially
Literate
Industry /
business
knowledge
Understand
organization
and its risks
Integrity and
an unbiased
perspective
Actively
engaged

7. Page 7
THE WHOS
Independence
INDEPENDENCE
No compensation
from organization
Not an affiliated
person of
organization or
any subsidiary
TRULY MAINTAINS
AN ATTITUDE OF
INDEPENDENCE
= + +

8. Page 8
THE WHOS
Who should fill the role of the audit committee
chair?
• Strong, independent and competent communicator
• Willing to ask tough questions of management and others
• Focused on risk management and financial oversight
• Financially literate but not necessarily a financial expert
• An experienced leader

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THE WHOS
Who else is needed to serve on the audit
committee?
• Two to five additional financially literate members with diverse
backgrounds and experience
• Diligent approach and inquisitive attitude
It is worth considering the industry expertise of potential audit committee members. Some
industries have specialized rules meaning it would be of value to have members with relevant
experience.

10. Page 10
THE WHATS
What should be the mission of an effective audit
committee?
Conduct and integrity of
Financial Reporting
Oversight of and
communication with
independent
auditors, both
internal and external
Risk Management,
including internal
accounting and
disclosure controls
OVERSIGHT

11. THE TONE AT THE TOP OF THE
ORGANIZATION
WHAT THE AUDIT COMMITTEE SHOULD DO IN RESPECT OF
Client name − Document title
Page 11

12. Page 12
TONE AT THE TOP
Providing the basis for ethical behaviour
How does the audit
committee assess the tone at
the top and ensure ethical
behavior in the organization?
• Promote honest and ethical
conduct, including when handling
actual or apparent conflicts of
interest
• Promote full, fair, accurate,
timely and understandable
disclosure in financial and other
reporting
• Promote compliance with
applicable governmental rules
and regulations

13. INDEPENDENCE
WHAT THE AUDIT COMMITTEE SHOULD DO IN RESPECT OF
Client name − Document title
Page 13

14. Page 14
THE WHATS
Independence
• Develop process whereby independence rules are communicated on a
regular basis
• Audit committee members should confirm their independence annually
in writing
• Pre approval of services to be provided by external auditor

15. RELIABLE AND TRANSPARENT
FINANCIAL REPORTING
WHAT THE AUDIT COMMITTEE SHOULD DO IN RESPECT OF
Client name − Document title
Page 15

16. Page 16
RELIABLE & TRANSPARENT FINANCIAL REPORTING
An unwavering mandate
The audit committee must
have an UNWAVERING
MANDATE for financial
statements that
TRANSPARENTLY and
MEANINGFULLY portray the
organization’s
circumstances.
• Ensure adequate review of the
annual report and financial
statements
• Look for “red flags” which may
signal improper or fraudulent
financial reporting
• Review audit adjustments made
or waived
• Ensure that financial reports
clearly reflect true performance

17. EXTERNAL AUDIT
WHAT THE AUDIT COMMITTEE SHOULD DO IN RESPECT OF
Client name − Document title
Page 17

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EXTERNAL AUDIT
Responsibilities of the audit committee
• Appointment of external auditors
• Evaluation of the performance of external auditors
• Monitoring the independence of external auditors

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EXTERNAL AUDIT
Evaluation of external auditors
The audit committee should consider the following:
Technical, industry and
financial reporting
expertise and depth,
including geographic
reach
Quality control policies
and procedures
Engagement team
composition
Independence
Training and technical
support
Frequent and
meaningful
communications and
interactions with audit
committees and
management

20. Page 20
EXTERNAL AUDIT
Independence of the external auditors
• What are firm’s policies and procedures for ensuring independence of
their partners and personnel with respect to the organization?
• Does the firm have adequate mechanisms in place to ensure that
independence violations do not occur?
• Organization’s policy on provision of permitted non-audit services.

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EXTERNAL AUDIT
Communication with the external auditors
Required communication Planning Completion As Required
Engagement letter Yes
Independence Yes Yes
Non audit work performed Yes
Nature and scope of work Yes Yes
Expected modifications to auditor’s report Yes Yes
Uncorrected misstatements and disagreements with management Yes
Significant deficiencies in internal control Yes Yes
Qualitative aspects of accounting practices and financial reporting Yes
Other matters required to be reported to TCWG Yes Yes
Any other matters of governance interest Yes Yes Yes
TCWG = Those Charged With Governance
The committee should have an open and frank discussion with the
external auditor’s about their judgment of the quality, not just the
acceptability of the organization’s accounting principles.

22. THE INTERNAL CONTROL
ENVIRONMENT
WHAT THE AUDIT COMMITTEE SHOULD DO IN RESPECT OF
Client name − Document title
Page 22

23. Page 23
THE INTERNAL CONTROL ENVIRONMENT
Understanding the framework of internal control
• Are issues pervasive throughout the organization or limited to
specific location(s) or account(s)?
• Were any issues identified in previous years? If not, what are the
implications of this?
• What is management doing to remediate the issue?
• What other controls are needed?

24. INTERNAL AUDIT
WHAT THE AUDIT COMMITTEE SHOULD DO IN RESPECT OF
Client name − Document title
Page 24

25. Page 25
INTERNAL AUDIT
Responsibilities of the audit committee
• Understand the scope of the internal auditor’s work and its specific
responsibilities
• Be involved in hiring / termination, selection and compensation of
key members of internal audit team
• Evaluate the adequacy of the internal audit department personnel,
and ensure there are sufficient resources to deliver
• Review any plans to outsource the internal audit function
• Review degree of co-ordination between internal and external audit
Communication is a two way street that should be designed to ensure that all parties involved
understand each other’s responsibilities, and that each receive relevant and timely information
to allow those responsibilities to be fulfilled.

26. UNDERSTANDING THE RISKS
FACING THE ORGANIZATION
WHAT THE AUDIT COMMITTEE SHOULD DO IN RESPECT OF
Client name − Document title
Page 26

27. Page 27
UNDERSTANDING RISKS
A systematic approach is needed
• Understand the organization’s strategy
• What is the organization’s “risk appetite”?
• What processes are employed by management to identify, assess and
manage risk?
• How can the committee review and appraise management’s response
to significant risks?
• Recognize that a strong internal control system is the key to risk
management

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UNDERSTANDING RISKS
Some considerations
• Review risk assessments developed by management and the auditors
• Recognize that risk comes in many forms
• Receive internal audit reports directly
• Review internal and external auditors’ recommendations for
improving controls, as well as management’s responses
• Ensure the infrastructure can support current and future financial
reporting requirements (a real risk in rapidly growing organizations)
• Obtain written representations from management on the
effectiveness of internal controls and information systems
• Learn lessons from historic breaches of internal control
• Ensure the full board understands the risk assessment

29. FRAUD
WHAT THE AUDIT COMMITTEE SHOULD DO IN RESPECT OF
Client name − Document title
Page 29

30. Page 30
THE WHATS
Prevention, deterrence and detection of fraud
• Management along with those who have responsibility for
oversight of the financial reporting process (such as the audit
committee) should set the proper tone, create and maintain a
culture of honesty and high ethical standards and establish
controls to prevent, deter and detect fraud.

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THE WHATS
Prevention, deterrence and detection of fraud
The Fraud Triangle
Pressure
Opportunity
Rationalization
• Pressure or incentive to commit
fraud
• Perceived opportunity to commit
fraud
• Rationalization of why it would
be acceptable to commit fraud
The audit committee must recognize the
presence and interaction of the risk
factors underlying fraud.

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THE WHATS
Prevention, deterrence and detection of fraud
• What are the significant fraud risks that the organization faces?
• How are these risks being managed?
• Are you aware of any instances of fraud, either actual, suspected or
alleged, including those involving management?
• What protocols and procedures have been established between the
audit committee and management to keep you informed of instances
of fraud, either actual, suspected or alleged?
• What fraud prevention and detection measures do you have in place in
the organization?
• What role do you have in relation to fraud?
Could your audit committee answer these questions in detail?

33. IMPLEMENTATION OF NEW
ACCOUNTING STANDARDS
WHAT THE AUDIT COMMITTEE SHOULD DO IN RESPECT OF
Client name − Document title
Page 33

34. Page 34
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
The audit committee has an important role to play
• How will implementation of the new accounting standards impact on
the organization’s controls over risks?
• Has management got the necessary expertise to manage the transition
effectively?
• Are there adequate plans to integrate business practices as well as
systems?
• How will management make the required estimates and judgments as
a result of the change in standards?
• How will the organization report the effects of the changes on its
financial performance?

35. REPORTING THE RESULTS OF ITS
WORK DURING THE YEAR
WHAT THE AUDIT COMMITTEE SHOULD DO IN RESPECT OF
Client name − Document title
Page 35

36. Page 36
AUDIT COMMITTEE REPORTING
The committee should produce an annual report
• Demonstrate ownership and accountability
• Be specific to the company, and to the year
• Say what you did using active, descriptive language
• Disclose judgment calls made for the year, and the sources of
assurance and other evidence drawn upon
• Consider your audience in describing issues and their context

37. Page 37
THE WHENS
Plan the committee’s calendar a year in advance
Experience demonstrates
that setting out a detailed
audit committee timetable a
year in advance contributes
significantly to the
committee maximizing its
effectiveness.

38. SHOULD AN EFFECTIVE AUDIT
COMMITTEE BE GOVERNED?
HOW
Client name − Document title
Page 38

39. Page 39
AUDIT COMMITTEE GOVERNANCE FRAMEWORK
The audit committee should have a formal, written
charter
• Scope of the audit committees
responsibilities
• How these responsibilities are
carried out
• Committee membership
requirements
• Must be a “road map” not a
“check the box” document
• A living document

40. DOES ONE MAXIMIZE THE
BENEFITS IN CONDUCTING AUDIT
COMMITTEE MEETINGS?
HOW
Client name − Document title
Page 40

41. Page 41
MAXIMIZING THE BENEFITS OF MEETINGS
Meetings must be well organized
• Committee members must participate in agenda setting
• Papers should be received and reviewed in advance of meetings
• Consider holding “executive sessions” with management
• Focus on asking the right questions
• Allow sufficient time for each item

42. SHOULD AN AUDIT COMMITTEE
REMAIN CURRENT?
HOW
Client name − Document title
Page 42

43. Page 43
ENSURING THE COMMITTEE REMAINS CURRENT
The committee needs to be up to date with
technical guidance
• Accounting and reporting updates from management and auditors
• “Bite sized” training on relevant topics
• External sources (webinars, etc)

44. SHOULD AN AUDIT COMMITTEE
EVALUATE ITS OWN
EFFECTIVENESS?
HOW
Client name − Document title
Page 44

45. Page 45
ASSESSING AUDIT COMMITTEE EFFECTIVENESS
An annual assessment should be performed
• Self assessment questionnaire
(standard or tailored)
• Consider against audit
committee charter
• Feedback on each other
• Feedback from others who
attend meetings
• Self assessment or independent
process

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ASSESSING AUDIT COMMITTEE EFFECTIVENESS
Checklists tend to overlook “softer” aspects
• Dominant audit committee chair
• Too much reliance on one person to ask questions
• Focus on areas in “comfort zone”
• Inability to stand up to strong members of management
• Members of the committee disengaged
• Poor management of meeting means some items are not given
sufficient attention

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CLOSING THOUGHTS
Principles for audit committee effectiveness
Principles for Audit Committee Effectiveness
Create the right tone at the top Develop a clear charter
Be independent Develop specific committee duties
Reflect a balance of skills Plan the year’s agenda
Make a time commitment Document the committee’s work
Assess effectiveness on an annual basis

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