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Home > Auditing Checklists > Creating a Comprehensive Audit Committee Evaluation Form

Auditing Checklists

Creating a Comprehensive Audit Committee Evaluation Form


Checklist Description

This checklist outlines a range of measures companies can take to help ensure that audit committees are performing their roles effectively.

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Definition

After the revelation of corporate fraud at Enron and evidence of management largesse at Tyco early in the new millennium, a lack of investor confidence in the veracity of some corporate earnings reports and questions over the integrity of some leading global executives sparked demands for dramatic improvements in global corporate governance. In the United States, the Sarbanes–Oxley Act (2002) required reforms to corporate governance practices, including the establishment of auditing and related attestations, ethics, and independence standards. Pressure grew elsewhere in the world for companies to tighten their corporate governance standards to meet the rising expectations of stockholders, to whom company boards and audit committees ultimately answer.

Given the elevated demands made by stockholders, activist investors, investment analysts, regulators, and journalists, many companies have sought to stay ahead of the curve by implementing formal measures to help verify the effectiveness of audit committees. Indeed, New York Stock Exchange proposals for improved listing standards have included the suggestion that companies should instigate formal evaluation processes for the entire board and for the board’s major committees, not least the audit committee.

There are many different approaches to ensuring audit committee effectiveness. The evaluation form method has rapidly gained favor, although this is most effective as part of a broader program that includes processes to secure the independence and objectivity of members. In general terms, the scope of the audit committee should encompass the full range of the company’s activities, rather than simply amounting to a box-ticking exercise relating to compliance with existing regulations.

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Advantages

  • Self-evaluation measures such as the evaluation form can help audit committee members focus on ways to improve existing processes.

  • The evaluation form approach enables interested parties to provide a frank assessment of the audit committee’s effectiveness on an anonymous basis.

  • This method also provides a forum for participants to raise issues that members of the audit committee themselves may not have considered.

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Disadvantages

  • Given the differences between company cultures and practices, no standard approach will consistently deliver major improvements in the effectiveness of all audit committees. However, the evaluation form can be a useful means of gauging the views of internal stakeholders.

  • The approach is only truly effective if the form is compiled in a way that elicits unbiased feedback from participants. Phrasing questions to prompt responses that the compilers favor is certain to undermine the process.

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Action Checklist

  • Agree on the evaluation process to be used and identify an individual to be charged with the overall responsibility for its coordination.

  • Consider the main elements of the evaluation form, such as organizational factors, the overseeing of the reporting process, and routes to possible improvement. The evaluation form can then be compiled, inviting participants to grade the effectiveness of all aspects of the committee and its activities.

  • Determine how communication should be handled with the main audit committee and other relevant individuals, such as the board chairman, independent auditor, and in-house legal heads.

  • Give the evaluation forms to all relevant parties, and then compile the results. Compare the results from different categories of participants to determine how perceptions of the audit committee’s effectiveness vary between different areas of the business.

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Dos and Don’ts

Do

  • Maximize the effectiveness of this approach by carrying out the process annually.

  • Leave space on the evaluation form for participants to add further comments on issues that may not have been considered when creating the form.

  • Obtain the advice of company legal experts on how the results of the evaluation process should be recorded and filed.

Don’t

  • Don’t regard the evaluation form as merely a means of demonstrating compliance with existing industry regulation. To do so could mean missing out on a real opportunity to improve the effectiveness of the audit committee.

  • Don’t use this evaluation approach as the sole means of improving the effectiveness of the audit committee. Rather, use this method of internally driven improvement in conjunction with other industry-wide best-practice methods to provide an externally driven element for further improvement.

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Further reading

Book:

  • Verschoor, Curtis C. Audit Committee Essentials. Hoboken, NJ: Wiley, 2008.

Articles:

  • Braiotta, Louis, Jr. “Corporate audit committees: An approach to continuous improvement.” CPA Journal (July 2002). Online at: www.nysscpa.org/cpajournal/2002/0702/dept/d074802.htm
  • Smith, L. Murphy. “Audit committee effectiveness: Did the blue ribbon committee recommendations make a difference?” International Journal of Accounting, Auditing and Performance Evaluation 3:2 (2006): 240–251. Online at: dx.doi.org/10.1504/IJAAPE.2006.010303

Websites:

  • American Institute of Certified Public Accountants (AICPA), providing an audit committee toolkit: www.aicpa.org
  • KPMG’s Audit Committee Institute: www.kpmg.com/aci

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