Companies complying with the UK Corporate Governance Code should have a properly constituted Audit Committee which acts independently of the executive to ensure that the interests of shareholders are properly protected in relation to financial reporting and internal control.
"Guidance on Audit Committees" (the Smith Guidance) assists company boards in making suitable arrangements for their Audit Committees, and assists directors serving on Audit Committees in carrying out their role.
The UK Corporate Governance Code requires the role and responsibilities of the Audit Committee to include monitoring the:
- integrity of the financial statements
- company's internal financial controls and, where appropriate, the internal control and risk management systems of the company
- internal audit effectiveness
- appointment, re-appointment, removal, remuneration and terms of engagement of the external auditor
- external auditor's independence
- supply of non-audit services by the external auditors
At least one member of a company's Audit Committee is required to have recent and relevant financial experience.
Audit Committees in company law
Ireland:
The European Communities (Statutory Audits) (Directive 2006/43/EC) Regulations 2010, S.I. No. 220 of 2010 were signed into law on 20th May, 2010. These Regulations give effect to Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 and created the legal requirement for "public-interest entities" in Ireland to have an audit committee. This requirement commences six months after the date of making the Regulations, giving an operative date of 20 November 2010. For further information see Chartered Accountants Ireland, Information Sheet 04/2010. An article on the introduction of mandatory audit committees was published in the Chartered Accountants Ireland November 2010 Corporate Governance Journal.
UK:
Section 1269 of the Companies Act 2006, by inserting section 89O into the Financial Services and Markets Act 2000, gave the Financial Services Authority (FSA) the power to make rules in the area of corporate governance in relation to listed companies (the rules do not apply to AIM or non-listed Plus Market companies). That power has been used to implement the European requirement to have audit committees and explain corporate governance structures. The FSA's Disclosure and Transparency Rules (DTR) (contained in the FSA Handbook), particularly DTR 1B and 7 create requirements in relation to audit committees.
Other useful information supporting audit committees includes: