An audit committee is established in a company through the board of directors and is charged with the supervision of financial disclosure. The enactment of the Sarbanes–Oxley act of 2002 strengthened the role of audit committees in a bid to monitor publicly owned organizations so that they can be prevented from squandering money. The audit committees act as the watchdogs that evaluate the financial records presented by organizations to verify if they are correct and genuine. This paper will highlight the various roles played by audit committees in enhancing the quality of financial reporting and disclosure.
Without a supervising body, public organizations can lose huge amounts of money through white-collar crimes. This is because organizations are able to combine their activities and thus cover their tracks so that they cannot be discovered. The audit committees are usually made up of professionals who do not work in the organizations that they are supposed to supervise. This goes a long way in preventing them from having any vested interests in their place of operation (Abbot & Parker 48).
The committees are very influential because they are the ones that vet the external auditors that are contracted by public companies. This in itself is very important because if the public organizations were left to choose external auditors on their own, they would go for the ones whom they know can cover their tracks on their behalf. The committee has a mandate to monitor the operations of the internal auditors so that they can compare the work done by external independent auditors against the work done by internal auditors.
The external auditors are under obligation to forward their findings concerning any form of squandering money in the organization they are currently working with to the audit committee so that legal action can be taken against the personnel that is found guilty of the offence. Investigations are supposed to commence once the external auditor has forwarded the report to the committee. The external auditor cannot be terminated or swapped with another without the authority of the committee. This is because it is known that managers and other senior personnel can swap auditors if they were allowed, and thus bring the ones that are willing to assist them to cover their tracks. This is why it is a requirement for public organizations to get authorization from the committee before they swap external auditors.
Glaum and Street explain that the role of external auditors is to analyze the financial records they are assigned to and forward their findings to the audit committees (78). The audit committees enhance the accuracy of financial records by shielding external auditors from being manipulated by anyone on what to report about their clients. The analysis of financial records is usually carried out quarterly.
The internal controls are also subjected to supervision by audit committees. The committee ensures that the internal controls adhere to the principles of accounting. In most organizations committee members go through orientation, that is, in form of unofficial gatherings that usually take place after normal working hours. During such gatherings, the committee members are given an opportunity to mingle with the key officials of the organization.
Other gatherings involve the external auditor and the committee, and the details of their gathering must remain confidential because no one is supposed to know about their coming together. This is important because if there is something wrong in an organization, its management would not know when the committee and the external auditor converged. The audit committees foster accuracy in financial reporting by perusing the records to establish whether there is equality in how the reports are presented.
In most cases, audit committees demand financial statements be accompanied by brief literature that is meant to explain why the figures are the way they are on paper. Technology has enhanced the work of audit committees because they do not have to handle the bulky statements anymore since organizations can now present their statements on the Internet which is very reliable, cost-efficient, and convenient.
Since the establishment of audit committees, the rate of white-collar crimes has drastically reduced in public organizations. This is because the committees have been able to identify the culprits and most of them have ended up in jail after losing their luxurious jobs. In case a company collapses when there is an audit committee in place, the committee is held responsible for the loss incurred because it is the one that is supposed to prevent such occurrences.
Audit committees are very effective in the US but then in some developing countries, this is not the case due to the nature of their cultures. For instance, in most Arabian countries there are no such bodies, especially where the country is headed by a dictator. This is because the few wealthy people are not comfortable with them. After all, they know the organizations are not meant to benefit the public but for their financial gains. Audit committees are designed to make public organizations remain accountable just like their counterparts in the private sector (Abbot & Parter 56).
In conclusion, before the enactment of the Sarbanes Oxley act, individuals working in state corporations were very sure that they could squander money and not get caught because they were entrusted by the government, hence they were unquestionable. Many countries are now considering setting up audit committees but one of their major problems is the lack of qualified individuals to occupy such positions. All state-owned organizations should have an audit committee that has members that are drawn from relevant fields. The roles of every audit committee should be clearly defined to avoid a clash of roles. In essence, the duties of audit committees involve supervision of financial operation, thus ensuring the quality of financial reporting.
Works Cited
Abbot, L. and Parker, S. “Audit Committees and Auditor Selection.” Auditing: A Journal of Theory and Practice 19(2000): 47-66.
Glaum, M. and Street, D. L. “Compliance with the Disclosure Requirements of Germany’s New Market: IAS versus US GAAP.” Journal of International Financial Management and Accounting 14.1 (2003): 64-100.