Article

Considering establishing an audit committee?

Aug. 27, 2013

A government is accountable for the services provided to taxpayers and for the way that it uses its resources to provide those services. One way to enhance accountability is to form an audit committee. Audit committees have four primary responsibilities:

• Oversee external and internal audit functions. An audit committee meets with internal and external auditors to discuss the audit plan and review audit results
• Oversee the financial reporting process. An audit committee will often meet with government officials and finance employees to review and monitor financial reports.
• Oversee the government’s internal controls. An audit committee has responsibility for overseeing that appropriate controls are in place to prevent, detect, and deter fraud and error.
• Ensure appropriate channels of communication exist for whistleblower policies, antifraud activities, and reporting of illegal acts. The audit committee can help set the "tone at the top" related to these activities.

Various industry groups, including the Government Finance Officers Association (GFOA), encourage the governing body of every state and local government to establish an audit committee or its equivalent. However, it is not enough to just establish an audit committee. In order for an audit committee to be effective, there are several characteristics a strong audit committee should have:

• The audit committee should be formally established. This can be done through a charter, enabling resolution or other appropriate legal means. The audit committee should be the auditors’ direct line of reporting.
• The audit committee should be independent from management. An audit committee is typically composed of three to seven members chosen from the governing body. Audit committee members who have managerial responsibilities should not serve on the audit committee. The role is one of governance, not of day-to-day activities.
• Membership. All audit committee members should have a basic understanding of governmental financial reporting. At least one member should have more than a basic understanding of governmental financial reporting, including an understanding of generally accepted accounting principles, experience in preparing or auditing financial statements, experience with internal accounting controls, and an understanding of the audit committee functions.