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Audit Committee: Role & Responsibilities

Instructor: Tiffany Crosby
In this lesson we will explore how a Corporate Audit Committee functions as an appointed body of men and women representing the investors of a company to protect their investment from financial wrongdoing.

Audit Committee Members: Appointed to Govern

Suppose you decided to invest the $5000 that you had saved through hard work and prudent spending into a company. Of course, you will want information on what was being done with the money. You may even want to have input into how the $5,000 is spent. Until you receive your investment back, you will want to know how well the company is doing financially.

Now imagine that one million other people also invested in the same company. They also want input on what is done with the money and information on how well the company is doing. By having this group of one million and one investors, elect a group of men and women to represent their interests in the company, management is able to focus on running the company instead of talking to investors all day. Investors elect a Board of Directors by casting a vote either by mail or by attending the annual meeting held for such purposes. Before voting, investors receive a slate of candidates that provides background information and resume details.

voting on board of directors

A few members of the Board of Directors (Directors) are then asked to serve on an Audit Committee. Since the Audit Committee consists of directors appointed to represent the interest of investors, they are expected to examine the company's financial reporting from the investors' perspective. They essentially oversee the reporting of the financial health of the company as your appointed representatives. They are able to ask management for information and are able to challenge management's decisions as it relates to accounting for, and disclosing, financial information. They are your only eyes and ears into how the company is tracking what management is doing with your resources. So, it's extremely important that they have the right qualifications for the job.

What's Expected of Audit Committee Members

Audit Committee members are appointed because the Board of Directors believe them to have the expertise to challenge the leaders of the company. They are expected to know about the company's business, to understand how the company makes money, to understand the competition, and to understand what could cause the company to lose money. They are also expected to know accounting rules and regulations. They are expected to attend all Audit Committee Meetings so that they can ask questions of the executives that are managing the company.

If you were asking questions of an expert, you would do your homework. You would research and study any information available on the expert's position. You would also study any information that contradicted the expert's opinion so that you could ask meaningful questions. You would read any information that was provided in advance of attending the expert panel, and prepare questions in advance based on your review. Audit Committee members are expected to do this same level of preparation, or due diligence, prior to every Audit Committee meeting. A company executive will send information packages in advance to inform the Audit Committee members of management's activities since the last meeting. Sometimes these information packages are very lengthy and may take several days to review appropriately. Regardless of how much time is required, every Audit Committee Member is expected to have reviewed all provided information.

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