Abstract: An audit committee composed of board members can be an effective antifraud mechanism. This article highlights some best practices for audit committees that have emerged over the last decade. A forensic accounting expert can help committee members follow these best practices — thereby helping to avoid and defend against potential fraud allegations from investors and lenders.
Audit committees are a critical defensive tool
An audit committee can be an effective antifraud mechanism. But it’s not enough for audit committee board members to simply review financial statements and audit results — it takes a far more proactive approach to catch a thief.
Does the committee follow best practices?
Audit committees have gained prominence since the 2008 financial crisis. Over the last decade, several best practices have emerged. Among other things, today’s audit committees typically:
Conduct fraud risk assessments. It’s important for the committee to identify the types of risks the company faces and their likelihood of occurrence. These assessments should include an evaluation of existing internal controls.
Understand the accounting issues. The committee must be more than just a passive receptacle for financial reports. Members should be familiar with relevant issues and recent developments, ask open-ended questions and challenge management on the accounting for complex transactions. If the company’s industry has specialized accounting rules, the committee members should consider consulting outside specialists who can bring them up to speed.
Communicate with external auditors. The committee needs to regularly communicate with outside auditors, because the external audit team performs many fraud prevention techniques. This communication includes formal meetings before the audit to elicit input on issues auditors should examine and formal meetings after the audit is complete to follow up on those issues.
Ensure compliance. The committee should verify that management is performing annual reviews of the company’s compliance programs and reporting systems. Members also need to familiarize themselves with ethics requirements, such as those in the Dodd-Frank Act, the Foreign Corrupt Practices Act and any applicable whistleblower laws.
Set an ethical tone at the top. Employees can’t reasonably be expected to abide by antifraud standards and processes if they don’t see proper behavior modeled and reinforced from the top of the organizational chart. Among other things, the audit committee can help foster a culture of accountability and integrity by establishing anonymous reporting mechanisms and requiring prompt investigation of, and follow-up on, whistleblower complaints.
Communicate with staff. Committee members shouldn’t restrict their internal communications to upper management or the CFO. They need to reach out to lower-level employees, too, so those employees feel comfortable reporting concerns and suspicions.
Audit committee members have a fiduciary duty to protect investors and lenders from fraud. Forensic accounting experts can help board members follow best practices and stay on top of fraud trends and compliance requirements. Such outside expertise can prove invaluable should a company find itself facing fraud allegations.