Audit Committees That Work: A Properly Constituted Audit Committee Is an Important Tool for Ensuring the Independence of the External Auditor and Thus the Reliability of the Financial Statement Audit

By Hall, Kathleen A. | Government Finance Review, August 2003 | Go to article overview

Audit Committees That Work: A Properly Constituted Audit Committee Is an Important Tool for Ensuring the Independence of the External Auditor and Thus the Reliability of the Financial Statement Audit


Hall, Kathleen A., Government Finance Review


The corporate accounting meltdown of 2002 raised public awareness of the importance of a properly constituted audit committee. Long before audit committees made headlines, however, GFOA offered practical guidance on audit management in the form of two separate recommended practices: Establishment of Audit Committees (1997) and Audit Procurement (1996). Properly implemented, these two practices go a long way toward ensuring high-quality performance from external audit firms.

AN EVOLVING PROCESS

For Douglas County, Nebraska, the process of establishing an audit committee and strengthening its role in the government has been a continually evolving one. Until 1995, the clerk/comptroller (an elected official) and the fiscal administrator (appointed by the Board of County Commissioners) were responsible for initiating and overseeing the audit procurement process, monitoring the performance of the external auditor, and reviewing and responding to audit comments from both the external and internal auditors. In 1995, the comptroller requested formal action by the Board of Commissioners to approve the establishment of an audit committee that would have broad oversight over these functions.

When the original committee was established, its members included the chair and vice chair of the Board of Commissioners, comptroller, treasurer, fiscal administrator, chief administrative officer, and chief deputy county clerk. The committee oversaw the development and award of the RFP for the county's annual audit. However, because of political impediments resulting from the composition of its membership, the committee was often unable to agree as to how to proceed with recommendations from both external and internal auditors. As a result, the audit committee as formed by the 1995 resolution informally suspended its activities.

With the promulgation of GFOA's 1997 recommended practice on audit committees, the comptroller sought and obtained the approval of the Board of Commissioners to re-activate the audit committee and to change its composition. The recommended practice provided guidance on the structure and duties of an audit committee. It also reinforced the idea that an audit committee enhances auditor independence and hence the reliability of the financial statement audit.

Establishment of Audit Committees specifically recommends that a majority of the members of an audit committee should be selected from outside of management and that the committee should include representatives of the executive and legislative branches of government. To comply with this guidance, the structure of the county's audit committee was subsequently changed to include the comptroller, fiscal administrator, and three accounting professionals from the corporate and/or educational community (one with a specialization in information systems auditing).

ROLES, RESPONSIBILITIES, AND RESULTS

The audit committee supervises the development of the county's RFP for external audit services. The committee members play an active role in the RFP development process to ensure that all necessary requirements are included, particularly those related to recent GASB pronouncements. After the RFP is issued, the committee reviews all submitted bids and selects an audit firm for recommendation to the Board of Commissioners for approval. The committee will begin development of an RFP for the next cycle of a multi-year audit contract this year.

The audit committee also reviews the annual financial statements, management letter comments, and any recommendations made by the external auditors. The committee discusses and approves corrective actions, and makes recommendations to the governing body based on the requirements of those corrective actions.

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Audit Committees That Work: A Properly Constituted Audit Committee Is an Important Tool for Ensuring the Independence of the External Auditor and Thus the Reliability of the Financial Statement Audit
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