By Don Wehby, Contributor REALITY LIMITS the ability of rules and laws to perfectly regulate the financial world. As such the responsibility lies in the hands of audit committees. These committees have the responsibility of serving as a communication link and conduit for the flow of information between a company's board of directors, its management team, as well as its internal and external auditors. It is common sentiment that the financial meltdown which occurred in Jamaica in the mid 1990s and the more recent Enron fiasco in the United States could have been avoided if audit committees had looked more closely at managing risks rather than simply the financial results. A key component of managing risk is managing the culture and integrity of the organisation. PUBLIC CONFIDENCE A fundamental factor underlying the success of the financial sector of any country, particularly after a financial meltdown, is the public's confidence in its financial institutions. It is therefore necessary that these institutions be held accountable to their investors and the public at large. The members of the committee, whose numbers usually range from three to six, must be elected by the full board of directors. The effectiveness of the audit committee relies on the knowledge and ability of its members who are required to be cognisant of the nature of business of the relevant financial institution. At the heart of an audit committee is its chair, who should be an outside director. This individual sets the standard adopted by the entire committee through his/her actions which should display integrity and a drive for complete transparency. The infrequency of the meetings of the committee and its dependence on secondary information demand that the members have strong analytical skills and the ability to be proactive in decision-making. RESPONSIBILITIES In order to ensure that the members of the audit team act independently of the board and are objective in making decisions and recommendations, there should be no relationship or association between members of the two bodies. The introduction of International Accounting Standards ( IAS) in July 2002, adds to the responsibilities of audit committees. Once the IAS has been implemented, the audit committees will have the oversight responsibility of ensuring adherence to these global reporting standards. The willingness to dedicate the time and energy to the processes involved with an audit committee is indeed necessary to achieve good corporate governance, but not the only means of attaining this goal. "The mere existence of an audit committee is not enough. The audit committee must be vigilant, informed, diligent and probing in fulfilling its oversight responsibilities." [Quoted from the National Commission on Fraudulent Financial Reporting (Treadway Commission)]. The demise of Enron underscores this viewpoint. It is the view of many that the blame for the company's demise can be laid squarely at the feet of its audit committee. An article in the Houston Chronicle states, "they were naive or lazy, and derelict in their duty as stockholders watchdogs". The article continues: "... having a really good audit committee was a rarity. Having one member who knew what he was doing was a luxury". DUTIES Duties of an audit committee include, but are not limited to:
The value of audit committees therefore, cannot be overstated. As such, the ideal situation requires that all government organisations and statutory bodies, as well as all listed Caribbean companies, should have active audit committees in place.