AUDIT COMMITTEES

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AUDIT COMMITTEES

• COMPOSITION, MANDATE AND OPERATION
• MARE-LISE FOURIE
• (FIMFO)Honorary life member

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CONTENT

• SECTION 1 INTRODUCTION
• SECTION 2 WHY?
• SECTION 3 WHAT?
• SECTION 4 HOW?
• SECTION 5 CONCLUSION

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SECTION 1 INTRODUCTION

• Local Government Transition Act Second Amendment
  Act, 1996 (Act 97 of 1996)
• New legislation

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SECTION 2 WHY DO WE NEED AUDIT COMMITTEES?

• 2.1 Governance requirements
• Any organisation is defined by its purpose. For a
  municipality it is most likely to be the
  provision of the highest level of services to
  the community it serves in a sustainable way and
  at the most economical rate.

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2.1 Governance Requirements (Cont)

• Objects of local government Section 152 of the
  Constitution
• Provide democratic and accountable government
• Ensure the provision of services to communities
  in a sustainable way

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2.1 Governance Requirements (Cont)

• Governance represents the means by which
  direction and control are applied to stewardship
  of an organisations assets tangible and
  intangible, financial and non-financial - in the
  pursuit and delivery of the primary objective of
  sustainable value creation

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2.1 Governance Requirements (Cont)

• Governance is therefore essentially a function of
  
• Leadership and direction
• Appropriate risk management and control
• The manner in which meaningful disclosure is made

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2.1 Governance Requirements (Cont)

• Seven primary characteristics of good governance
  King Report 2002
• Discipline
• Transparency
• Independence
• Accountability
• Responsibility
• Fairness
• Social responsibility

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2.2 New Legal Requirements

• Local Government Municipal Finance Management
  Act, 2003 (Act 56 of 2003)
• Section 166
• Establishment
• Duties
• Requirements
• Composition

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SECTION 3 WHAT IS AN AUDIT COMMITTEE?

• Definition
• An audit committee is an independent advisory
  body appointed by a council and tasked with
  specific responsibilities as set out in an audit
  committee charter approved by a council

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What is an audit committee? (Cont)

• Content of an audit committee charter
• Objectives
• Functions and responsibilities
• Authority
• Organisational requirements
• Reporting requirements
• Relationship with council, management and
  internal and external auditors

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3.1 What are the objectives of an audit committee?

• To assist the council in fulfilling its oversight
  responsibilities
• To review
• Financial reporting process
• System of internal control and management of
  financial risks
• Audit process
• Compliance
• To maintain effective working relationships with
  council, management, auditors

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3.2 What are the duties/responsibilities of an
audit committee?

• Key performance areas
• Financial reporting
• - Timely, objective and complete disclosures
• - Financial position
• - Results of operations, plans and long-term
  commitments

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Key performance areas (Cont)

• Corporate governance
• Compliance
• Ethics
• Effective and efficient control systems to
  prevent fraud, etc.
• Governance by an audit committee
• implies oversight not management

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Key performance areas (Cont)

• Corporate control This includes control over key
  financial and operating risk areas and systems of
  internal control
• Objectives of internal control
• Reliability and integrity of information
• Compliance
• Safeguarding of assets
• Economical, effective and efficient use of
  resources
• Performance management

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Legislated duties of an audit committee

• Section 166 of the MFMA
• Advise on matters relating to the following
• Internal financial control, internal audits
• Risk management
• Accounting policies
• Adequacy, reliability and accuracy of financial
  reporting and information
• Performance management
• Effective governance
• Legislative compliance
• Performance evaluation
• Other

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Legislated duties of an audit committee (Cont)

• Review AFS with regard to the following
• Financial position
• Efficiency and effectiveness
• Compliance
• Respond to issues raised by the Auditor-General
• Investigations

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3.3 What is the authority of an audit committee?

• To obtain/seek/gather information from internal
  or external sources
• To request/obtain outside legal or other
  professional advice
• To ensure attendance of officials/councillors
• To initiate special investigations

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SECTION 4HOW DO AUDIT COMMITTEES OPERATE?

• Organisational arrangements
• New member orientation
• Reporting responsibilities
• Evaluating the performance of the audit committee
• Building better working relationships

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4.1 Organisational arrangements

• Appointment of committee members
• Size of committee
• Membership requirements
• Term of office
• Remuneration of members
• Attendance of officials
• Arrangements for meetings

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4.1 Organisational arrangements (Cont)

• Appointment of members
• Majority of members not in the employ of the
  municipality
• No councillors
• Chairperson not employee
• Size of the committee
• Large enough to represent a balance of views but
  small enough to operate efficiently
• Size of the organisation to determine 3 to 6

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4.1 Organisational arrangements (Cont)

• Membership requirements
• Critical success factor for performance
• Accounting or related financial management
  expertise
• Legal background
• Ability to read and understand basic financial
  statements

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Membership requirements (Cont)

• Qualities that each member should possess
• Integrity
• Independence
• Dedication of time and energy
• Understand local government business, risks and
  control
• Knowledge in financial matters
• Good communication skills
• Inquisitiveness and independent judgement
• Chairperson should possess strong leadership
  qualities and
• ability to promote effective working
  relationships

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Term of office of members

• Normally varies between 1 and 3 years
• When considering weigh following
  considerations
• Continuity
• Freshness
• Staggered terms to balance above considerations

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Remuneration of members

• Compensate members not in employ
• Re-imbursement of expenses
• Negotiated fee per hour
• Tariffs applicable to the Office of the
  Auditor-General

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Attendance by officials and other parties

• Standing invitation
• Accounting officer
• Chief Financial Officer
• Internal auditor
• External auditor
• Representative of the Office of the
  Auditor-General
• Other person or employee

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Meetings

• Number of meetings
• At least four times per year
• Actual number influences by objectives and scope
  of activities
• Generally correspond with major phases of
  financial and performance reporting and external
  and internal audit cycles
• Agenda
• Quorum
• Secretarial functions
• Minutes

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4.2 New member orientation

• New committee members should be provided with
  sufficient
• Information and training with regard to at least
  the following
• Audit committee charter
• Municipalitys financial and operational controls
• Accounting policies
• Municipal operations and areas of risk
• Background and qualifications of senior
  executives and financial management
• Responsibilities of the internal audit function
• Internal audit plan
• Scope of external audit

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4.3 Reporting responsibilities

• Duty to report to council on the following
• Summary of committee activities
• Relevant recommendations
• Matters that impact on the financial condition os
  the municipality
• Matters that impact on the affairs of the
  municipality

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4.4 Evaluating the performance of the audit
committee

• Done through self assessment with inputs from
  management and internal and external audit teams
• Chairperson to evaluate performance of individual
  members
• Council to evaluate performance of chairperson
• Evaluation criteria
• Expertise and know how
• Attitude, objectivity, judgement and independence
• Understanding of and commitment to duties
• Attendance of meetings
• Timely responses
• Knowledge of municipality and its objectives
• Corrective steps if required

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4.5 Building better working relationships

• Effective oversight requires the audit committee
  to ask difficult questions and expect reasonable
  answers
• A strong working relationship can be established
  by the following
• Developing and maintaining a code of conduct
• Encouraging ongoing communications

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SECTION 5CONCLUSION

• In the context of corporate
• governance, a proper balance needs to
• be achieved between the freedom to
• manage, accountability and the
• interest of different stakeholders
• The King Report

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CONCLUSION (Cont)

• 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
• Report of the National Commission on Fraudulent
  Financial Reporting (Treadway Commission)

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CONCLUSION (Cont)

• An audit committee should never be seen or
  treated as a necessary evil but rather as a
  trusted ally
• Its greatest virtue is its independence which
  allows it to challenge management decisions and
  evaluate corporate performance from a completely
  free and objective perspective

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• THANK YOU