Audit committees need to play more active role: CEPR

Audit committees of boards of companies need to play a more active role for stronger checks against all financial and governance related wrongdoings, right-leaning think tank Centre for Economic Policy Research (CEPR) has said.

There is a need to clearly define the responsibility and accountability for the auditors as well as the audit committees, the CEPR said in a report.

"The management in all fairness does expect the auditors to catch loopholes. But it becomes almost impossible to detect many of them especially with limited scope and undefined area of work and powers," it added.

In these circumstances, it becomes unfair to blame only auditors for the challenges that may occur pertaining to financial reporting, the CEPR report noted.

Ways and means need to be explored to improve the role of the audit committee and to make it more involved and responsible, the think tank said.

It further said that the role of one of the most important committees of the board cannot be limited to post-facto analysis and fire-fighting, as seems to be the case at present.

The increased regulatory actions on the audit profession has led to focus being shifted to the role of audit committees whose primary function is to oversee the financial reporting and related internal controls.

“The fast-changing business and risk environment is constantly been reshaped by technology, digitisation as well as globalisation and it continues to raise the bar on audit committee oversight and board governance," said Pavan Kumar Vijay, Founder-Corporate Professionals, a Corporate and legal Advisory firm.

Audit committees are required to be familiar with the processes and controls the management has put in place and understand whether those processes and controls are designed and operating effectively.

These committees are expected to work with the management, the internal auditors, and the independent auditors to gain the knowledge needed to provide appropriate oversight of this area.

An independent auditor is typically responsible for expressing an opinion on the fairness with which the financial statements present, in all material respects, the financial position, the results of operations, and cash flows in conformity with the accounting principles.

The audit committee, management, and the independent auditors all have distinct roles in the financial reporting process. The audit committee's primary function is to oversee the financial reporting and related internal controls.

Management is responsible for preparing the financial statements, establishing and maintaining adequate internal control over financial reporting and evaluating its effectiveness.

On the other hand, an independent auditor is responsible for expressing an opinion on the fairness with which the financial statements present, in all material respects, the financial position, the results of operations, and cash flows in conformity with the accounting principles.

The audit committee is responsible for overseeing the entire financial reporting process. To do so effectively, it should be familiar with the processes and controls that management has established and determine whether they were designed effectively.