The primary means that a state body has of reporting on its activities is its annual report and financial statements. Boards are required to establish an audit committee to advise on internal controls (including corporate governance) and audit matters.
The Committee should provide an independent and objective review of the financial reporting process, internal controls and the audit functions of an organisation. Its role is advisory rather than supervisory in nature. The actual composition and duties of an Audit Committee will reflect the size and character of the organisation. An audit committee can:
- promote the understanding of audit's function and status within the organisation;
- enhance the independence and perceived value of internal audit;
- provide a forum for senior management to discuss internal control, including issues raised by internal and external audits;
- assist the head of internal audit in judging priorities; and
- aid the co-ordination of internal audit, external audit and any other consultancy and inspection reviews.
The Code of Practice for the Governance of State Bodies (2001) states that boards
should establish an Audit Committee of at least three independent non-executive Directors with written terms of reference which deal clearly with its authority and duties. The Audit Committee should:
- be a formal sub-committee of the board;
- have at least three members. In commercial state bodies, these members must be non-executive directors. The chairperson may not chair this committee;
- have written terms of reference;
- meet at least four times a year;
- for those public bodies employing external auditors, meet the external auditors at least once a year;
- have sufficient standing in the organisation with explicit authority to investigate any matters within its terms of reference, the resources that it needs to do so and full access to information. It should be able to obtain outside professional advice and, if necessary, invite outsiders with relevant experience to attend meetings
For civil service departments and agencies with appointed Accounting Officers the Report of the Working Group on the Accountability of Secretaries General and Accounting Officers (the Mullarkey Report), 2002, states
there should be a formally constituted Audit committee in each Department/Office operating with a written charter, have at least two external members and prepare an annual report to the Accounting Officer.
Many Companies incorporated in Ireland under the Companies Acts will be required to establish Audit Committees when the relevant sections the Companies (Auditing & Accounting) Act 2003 become law. The Office of the Director of Corporate Enforcement has recommended July 2008 as a target date to combine with similar requirements associated with the implementation of the EU 8th Directive.
Quoted plc's they also come under Stock Exchange requirements to abide with the corporate governance guidelines of the Financial Reporting Council. The requirements of audit committees are addressed in The Combined Code on Corporate Governance (2003, 2006) and the Guidance on Audit Committees (the Smith Report). While written for quoted companies these guidelines are generally accepted as best practice in the field of corporate governance.
Composition and Duties
To comply with the Code of Practice for the Governance of State Bodies (2001) an Audit Committee should be a formal sub-committee of the Board and meet the requirements listed below. In the case of Audit Committees constituted for Departments and Offices covered by the Mullarkey Report the overall principles are similar though there is recognition of the particular circumstances of smaller organisations.
The Audit committee of a State body should
- Have at least three members – for commercial bodies, these members must be non-executive directors. The chairperson may not chair this committee
- Have written terms of reference
- Meet at least four times a year
- Meet the external auditors at least once a year
- Have sufficient standing in the organisation with explicit authority to investigate any matters within its terms of reference, the resources that it needs to do so and full access to information. It should be able to obtain outside professional advice and, if necessary, invite outsiders with relevant expertise to attend meetings
The guidance for Audit Committees set up under the Mullarkey guidelines are that they should
- Operate under a written charter
- Have significant external representation (at least 2 members), including, in the normal course, representatives from the private sector with appropriate expertise. The Chairperson of the Committee should come from outside the Department.
- Prepare an annual report to the Accounting Officer reviewing its operations.
- Invite the Comptroller and Auditor General, or his nominee, to meet the Committee at least once a year.
Monitoring of Audit
The constitution and terms of reference of the audit committee should be reviewed by the board from time to time and updated as appropriate.
The chief executive, head of finance and head of internal audit should attend meetings (though not as members of the audit committee).
Items for discussion at committee meetings may include
- the head of internal audit's recent work and future work plan;
- the head of internal audit's annual report to the accounting officer or chief executive;
- the audit needs assessment and the implications arising from it;
- unresolved findings from audit assignments, proposals to deal with them and progress reports;
- major policy issues and their implications for internal control;
- the plans and findings of external audit;
- the implementation of recommendations by internal and external auditors; and
- corporate governance compliance.