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Leadership 101 – The Role and Responsibility of Directors – Part 10

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Please note that this pertains to South African Legislation, the King Requirements, and Best Practice.

Today we take an in-depth look at Audit Committees.

Now I understand that many of you who are reading this don’t have the numbers in terms of people and resources to have an “Audit Committee” as you may be a Solopreneur or only have a few employees or you feel that your Company is still too small to warrant this.

The reality, of course, is that you may not need a ‘full Audit Committee’ but let me be very clear on this . . . it is in your own best interests to understand what can go pear-shaped, how to prevent it, and then how to monitor, and measure to ensure that things don’t get to that state.

I can’t even begin to tell you of the number of occasions when I’ve heard the small business owner say things like “ but I trusted the guy/girl and made them part of my family, how could they do this to me?” Believe me, they can and they will if given half a chance!

The purpose of an independent Audit Committee is:-

“It fulfills a vital role in Corporate Governance. It is vital to ensure the integrity of integrated reporting and internal financial controls and it identifies and manages financial risks.”

Even in a small business that does not warrant a full internal Audit Committee, it is important that someone fulfills or is responsible for this role, especially in the internal financial controls and the management of financial risks. Please understand that it is not the responsibility of the “bookkeeper/accountant!” It needs to be someone outside of the bookkeeper/accountant!

Here are some of the questions that Directors should be asking irrespective of the size of the Company.

1. “Does the Audit Committee have the appropriate skills to discharge its’ responsibilities, specifically the skills required to oversee integrated reporting.”

In the smaller businesses, this is about making sure that you have the necessary financial literacy to understand the numbers that are reported by the bookkeeper/accountant and to ensure that there is proper segregation of duties. Usually, the numbers (or lack thereof) will tell you that there is a problem, long before you actually are aware of it.

2. “Has a process been approved by the Board to allow the Audit Committee to consult with specialists or consultants to assist the Audit Committee with the performance of its functions?”

So if for example, you are not a specialist or you don’t have an understanding of the ‘how to’ of writing and implementing a process, do yourself a favour . . . get a specialist in to do that for you. You would not try and service your car if you don’t understand how the engine works or is put together, so why would you write a procedure or process if you don’t know how to do it.

3. “Is there effective communication and coordination of the Board’s oversight activities to ensure that the Audit Committee is informed of all significant actual or potential financial and non-financial risks?”

Communications between all the stakeholders i.e. the different divisions and/or the various Committees is a must. This will ensure that potential financial risks are reported sooner rather than later when there is an obvious problem.

4. “Does the Internal Audit function have the appropriate skills and resources to deliver on expectations regarding the review of Internal Financial controls.”

Please don’t do what a client of mine once did and that was to appoint the tea lady and the receptionist onto the Audit Committee. I’m sure that you can understand that they are in no way competent to manage that portfolio. It’s not just about putting ‘bodies’ into positions to be able to say “I have an Audit Committee”, but more about putting the right people into the right space. Make sure that the people who are performing the task are capable and equipped, to fulfill the role. It is not necessary for the Committee members to be qualified Internal Auditors, but they do need to have a level of experience that would add benefit.

5. “Does a mechanism exist for resolving the difference of opinion between the Audit Committee and the Board regarding the Audit Committee’s statutory responsibilities should such differences arise?”

Don’t wait until there is a difference of opinion in the Audit Committee that cannot be resolved, to now try and find a way to find a resolution. Be proactive and put a process in place with perhaps someone in authority who will be able to mediate and bring closure to the parties who have differences of opinion.

Next time we will have a look at specifically what the requirements are around Ethical Leadership and Corporate Citizenship.