Audit Committee

An audit committee is a board-level committee responsible for overseeing a company’s financial reporting, disclosure, audit processes, internal controls, and related risk management. For U.S. publicly traded companies, a qualified audit committee—composed of independent directors and including at least one member with financial expertise—is required for stock exchange listing.

Key points

• Oversees accuracy and integrity of financial statements and disclosures.
• Supervises external auditors and the internal audit function.
• Monitors accounting policies, regulatory compliance, and risk management (including cybersecurity).
• Has authority to initiate special investigations and request information from management.

Composition and qualifications

• Typically made up of independent, outside members of the board of directors.
• Must include at least one financial expert (many exchanges and rules require financial expertise).
• Members often receive additional compensation for committee service; assignments can change as board composition evolves.
• Duties and composition are typically disclosed in the company’s proxy statement.

Primary responsibilities

• Review and approve quarterly and annual financial statements and related disclosures.
• Oversee selection, compensation, independence and performance of external auditors.
• Monitor internal controls, accounting policies and any changes in significant accounting practices.
• Supervise the internal audit function and authorize special investigations when issues arise.
• Maintain regular communication with the CFO, controller and auditors.
• Evaluate compliance with relevant laws and regulations.
• Discuss enterprise risk management policies and significant risk exposures with management.

How the committee operates

• Meets regularly—commonly at least quarterly—to review audits and reporting. Additional meetings are called as needed.
• Works directly with external auditors and the internal audit team to assess audit findings and remediation plans.
• May convene executive sessions with auditors (without management present) to discuss sensitive matters.
• Documents actions and findings in minutes and disclosures required by regulators.

Hazards and challenges

• Detecting and preventing fraud across large, global organizations.
• Managing auditor independence and conflicts of interest (for example, consulting relationships).
• Overseeing cybersecurity and other evolving operational risks that affect financial reporting.
• Ensuring adequate expertise on the committee to understand complex accounting or financial instruments.

Best practices

• Maintain a majority of independent directors and at least one financial expert.
• Hold frequent, scheduled meetings with ad hoc sessions for emerging issues.
• Preserve open lines of communication with auditors and senior finance executives.
• Periodically review and update risk oversight, internal controls and cyber-resilience measures.
• Ensure transparent disclosure of the committee’s role, membership and activities in regulatory filings.

Conclusion

The audit committee is a central governance mechanism that helps ensure the integrity of a company’s financial reporting, the effectiveness of audits and the adequacy of internal controls and risk oversight. Robust composition, regular oversight, and clear procedures are essential for fulfilling its responsibilities and protecting stakeholders.