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What Is a Corporate Audit Committee?

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  • Written By: M. Kayo
  • Edited By: Susan Barwick
  • Last Modified Date: 03 November 2016
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A corporate audit committee is a group of people, usually from the board of directors, who oversee the accounting procedures, financial reporting, regulatory compliance, and disclosure of financial information. Corporations that are publicly traded on a stock exchange are required by law to report and disclose this financial information to shareholders. Typically, a corporate audit committee will hire outside consultants to assist it. Responsibilities of a corporate audit committee include regularly scheduled reviews of financial reports, communicating with senior management to implement new accounting practices or regulations, and if necessary, hiring an outside consultant to conduct a special investigation if any irregular or illegal accounting activities are alleged or identified.

One of the primary roles of the audit committee is oversight of the financial reporting process and how that financial information is disclosed. Committee members must be informed, proactive, accountable, and willing to investigate all alleged or actual accounting irregularities and illegal activity within the organization. Audit committees review annual and quarterly reports, oversee compliance with laws and regulations, and report on significant financial issues. The corporate audit committee has authority to challenge any questionable management procedures or methods, particularly in the area of accurate accounting, risk management, and financial responsibility.

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The rules and procedures used for making decisions that affect the corporation must ensure the best possible outcome or success while maintaining a balance with the wants and needs of the shareholders in that corporation. Audit committees were developed due to diminishing public and shareholder trust in corporations. New methods of accountability, including corporate audit committees, have been introduced as a way to put an end to illegal or unprofessional activities. Members of these committees have a fiduciary duty to make sure the corporation learns and follows best accounting practices, avoids conflicts of interest, and guards the financial stability of the organization.

An outside auditor may be hired and overseen by the corporate audit committee. This auditor is usually accountable to both the corporate audit committee and the board of directors. In the US, the Sarbanes-Oxley Act requires external auditors hired by publicly-traded U.S. corporations to report directly to the audit committee. The activities and relationship between the corporate audit committee and the external auditor are regulated by governing authorities like the Securities Exchange Commission (SEC) and the New York Stock Exchange (NYSE). All of the duties and responsibilities of the corporate audit committee along with any findings of the external auditors are designed to make corporations more financially accountable to shareholders and to prove compliance with appropriate regulations.

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