Roles Played by Audit Committees in the United Kingdom and United States of America - Essay Example

Audit Committee Audit Committee Introduction An audit committee refers to an operating committee made up of members who are the board of directors of a company and performs the role of overseeing the financial reports. The majority of these committees are made up of a minimum of three members to a maximum of seven memberships. In the United Kingdom and USA, for a company to be listed on the stock exchange, it is mandatory that it has a well-equipped and qualified audit committee. They are significant in ensuring that the auditors and finance officers of the company remain independent. We are going to look at the different roles played by audit committees both in the United Kingdom and United States of America. Also, we shall compare the similarities that arise between the two countries in legalizing the roles played by these committees. We are going to look at both the disadvantages and disadvantages that these committees pose to a given company. For a company to have effective corporate governance, it must have an active and inclusivity in the participation of each and every principle champions and stakeholders of the company. The audit committee, the administration and top management, the independent external auditors, the board of directors and the internal auditors must come together in championing the roles of their company. The audit committees will always consider itself successful in their roles if the major stakeholders of the company collaborate in the most economical way, more effectively and in a more efficient manner. The roles of the audit committees are essentially the same, but their functions and key responsibilities may vary from different companies. After doing their job, they forward them to the board of directors who finally either approve or disapprove them. Functions of the Audit Committee The audit committee of a company has a number of functions that are very crucial for the success of the company. They oversee the activities that may be related to the financial risks and uncertainty of the company. The members who form the audit committee must have full knowledge of their oversight role in detecting and minimizing any possible financial risks. The risk management done by the committee involves the process of detecting those risks that can prevent the company from achieving its set goals and objectives. They identify the possible risks, conduct an analysis on them, try to do away with certain risks and finally come up with ways to curb and manage those that they are left with. Due to this, they can react and respond to towards a certain financial risk in the company and address them, therefore enabling the company to achieve its objectives. The other role of the audit committee is to oversee the internal control of the company. For a company to have an effective control environment, it must have a reliable committee in charge of oversight. This role is collectively played by the companys administration, both internal and external auditors and the audit committee. They perform control activities, where they put in place policies and procedures that ensure the required action are taken in dealing with the risk that may hinder the companys operations. They conduct effective communication so as to enable the staffs to do their jobs effectively within a given time frame. They play the role of overseeing financial reports of the company prepared by the financial officers of the company. Here, they try to monitor transparency and integrity of the financial statements submitted by the financial officers. They make sure that the laid financial and accounting policies and measures of a company are followed during financial activities and transactions of the company. It is very crucial and mandatory for an audit committee to have full knowledge of the companys financial statements. The audit committee plays the role of evaluating both the internal and external audit processes. The auditing of the companys financial reports and standings is supposed to be conducted by a body of external auditors who are independent and should not be influenced by any of the companys organization. The audit committee plays a role in ensuring that the efforts of the external and internal audit are coordinated effectively, and they should complement each other as well. In this case, the independent external audit has the responsibility of giving out their opinions on the integrity and faithfulness of the financial statements submitted (Boris Lvov, 1999). A company having the audit committee enjoys some demerits as unlike those without the audit committee. An audit committee improves the financial practices and reporting of a company concerned. They conduct regular meetings with different top administrators and financial officers so as to do close monitoring, review, oversee and help in giving appropriate directions aimed at checking the internal controls and the process of preparing financial reports and statements. The audit committee puts in place the strategies of internal submission and reporting. This is more advantageous as compared to the reports that are directed to the companys directors. When the reports are directly submitted to the directors, they may keep away or even amend some part of the unfavorable internal audit for some selfish reasons or their personal gains. The audit committee raises the confidence and trust of the companys shareholders and the public. This is because the companys finances have been overseen and reviewed by an external, independent and reliable committee. This will make the company enjoy a large number of people willing to buy its shares and even other shareholders buying more shares. For example, in the United Kingdom, the Beaverbrook the Jewelers, a company that deals with retailing of jewelers, with its headquarters in St Annes-on-Sea experienced an increased number of shareholders and shares in total after employing the use of the audit committee. This made them to be able to invest more and expand and open new business premises in other areas. The audit lays a good strategy of communication between the companys administration, its directors, and the external auditors. For example, Bard Pharmaceuticals, a company based in Cambridge and deals with pharmaceuticals, enjoyed a better communication between its directors, administration, and external auditors after employing the use of the audit committee. This was revealed during the annual meeting and reporting of the companys financial standings and sharing of dividends in Cambridge. They reported that by employing the audit committee there was an improvement in the effectiveness of their operations due to increased communication efficiency among its chief executives. Disadvantages of an Audit Committee However, there are some disadvantages that a company faces due to the use of the audit committee. Companies with an audit committee always operate under the fear that the main aim of the audit committee is to do away with the management. For example, in the United Kingdom, Hilti (Great Britain), a company based in Manchester, that deals with tools, fixings and fastening suffered the loss its managements morale and motivation due to fear of them being fired. This was after the company employed the use of the audit committee to oversee its management and financial risks. Due to this the management failed to deliver and beat their set targets by the top administration. The company suffers from additional costs they incur in terms of the time they get involved in during the auditing processes. The company has to spend more on paying the audit committee staffs and personnel. They also tend to do away with some of their activities so as to create time for the audit committee, and respond to the queries and lack of financial integrity reported in their findings. Baker and McKenzie, a legal firm in the United Kingdom, based in London, claimed to have lost most of its administrative time when dealing with the reports of the audit committee they employed in overseeing their management. The other disadvantage of the audit committee is that it burdens the non-executive directors with a lot of details they do not need to look at. Childbase Partnership, a childrens nursery company in the United Kingdom, with its headquarters in Newport Pagnell, reported that some of its non-executive directors were involved in a lot of details, outside their profession, when the company decides to employ a certain audit committee in overseeing its financial risks. Limitations of an Audit Committee The audit committee faces some limitations in their operations within different companies. The first limitation is that the companys chief executive officer responsibility is limited up to a certain level. He is only allowed to prepare and present the yearly financial statements to the companys board of directors. The roles of the independent auditors are also limited to some extent. They are only entitled towards auditing and over viewing the financial statements forwarded to them by the company chief executive officers. The audit committee can only exercise the responsibilities and powers that they are given under the Audit Committee Charter. Due to this they cannot determine the companys financial statements and compile them as well. These can only be done by the management and the independent auditors of the company. The fall of TESCO Tesco had lost about 50% of its market value in a given financial year. The companys sales and profits have always gone down after each financial year; these were mainly due to problems they face in their accounting techniques and forecasting of their future profits. This was mainly due to lack of transparency and integrity from its financial officers. A lot of frauds were reported due to some of the members of its top management engaging them in stealing from the company. What they could have done was to employ the use audit committee in overseeing the management and financial risks. Comparing it to Sainsbury, who used the audit committee to oversee the management roles and risk, they could be now flourishing and expecting higher annual profits. The audit committee overseeing the financial accounts of Sainsbury reports that there are high transparency and accountability in the companys financial reports. Conclusion In conclusion, we can say that audit committees are relevant to the companys success. So as to increase financial trust and accountability, the company needs to employ an oversight committee. Though the challenges and limitations are facing these committees, they need to exist so as to help the company achieve its goals and objectives. An increase in financial integrity and transparency is an important factor in ensuring that the company enjoys high profit, which is the main aim of starting a business organization. References Boris Lvov., 1999. Corporate Governance, Performance and Compliance. The Role of the Audit Committees. DeFond, M. L., Hung, M. and Trezevant, R., 2007. Investor Protection and the Information Content of Annual Earnings Announcements: International Evidence. Journal of Accounting and Economics, 43, 37–67. Jensen, M. C. and Meckling, W. H., 1976. Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure, Journal of Financial Economics, 3, 305–360. Read More