Academic journal article The Journal of Government Financial Management

Characteristics: Of Effective Audit Committees in Federal, State and Local Governments

Academic journal article The Journal of Government Financial Management

Characteristics: Of Effective Audit Committees in Federal, State and Local Governments

Article excerpt

The Research

The private sector financial debacles earlier in this decade resulted in sweeping corporate governance legislation known as the SarbanesOxley Act of 2002 (SOX). SOX places significant new responsibilities on audit committees of public companies, including increased responsibility for external and internal audits.

While not subject to SOX, many governments have had audit committees for many years. Others have expressed interest in, initiated, expanded, modified and/or strengthened their audit committees since passage of SOX. To provide improved information on government audit committees, the objective of this research was to "identify the characteristics of effective, mature audit committees at all levels of government - local, state and federal."

The research was performed by discussion and interviews with more than 135 knowledgeable individuals, analysis of information on 35 audit committees and several onsite visits.

What We Found

While no all-encompassing legal or regulatory requirements exist for government audit committees, many governments have successfully implemented audit committees to strengthen their internal and external audit functions, internal controls, financial management, financial reporting and overall governance. The absence of requirements has enabled these governments to shape and structure their audit committees to meet their specific needs. Several governments also mandate audit committees for entities under their jurisdiction.

Several Potential Sources of Guidance

Five organizations have published guidance for the mission, structure, responsibilities, membership, activities and operations of audit committees at different levels of government:

* The American Institute of Certified Public Accountants (AICPA) - all governments;1

* Deloitte & Touche LLP (D&T)state and local governments;2

* Department of Defense (DoD) Inspector General - DoD entities;3

* Government Finance Officers Association (GFOA) - local and state governments;4

* KPMG Peat Marwick (1989)- local and state governments;5

* and KPMG LLP (2003)- federal entities.6

The research report compares key features of these guidance documents. While the guidance is similar on many subjects, it significantly differs in other areas. Some differences are explained by the level of government to which the guidance is aimed, for example committee title, mission and membership and relations with the internal and external auditors. The similarities and differences were evident in practice among the audit committees reviewed, reflecting the flexibility available to governments in establishing their own audit committees.

Several guidance publications include very helpful checklists, sample charters, sample questions and other useful guides. CPA firms and the AICPA also have websites devoted to corporate governance, including audit committees.7

Are the Committees Effective? Do They Add Value?

Since government audit committees typically do not have quantitative performance metrics, we asked interviewees whether they thought their audit committee "adds value" to their government.

With a few exceptions, most interviewees think that their audit committee is effective, meets the goals for which it was established, and improves the entity's financial management and overall governance. In several cases, however, we were told that committee effectiveness depends directly on capabilities of the committee chair and/or committee members and whether the committee included financially literate individuals. Some more frequently mentioned "values added" included:

* A Best Management Practice - A strong audit committee is a best practice to improve the entity's governance and financial management.

* Accountability and Transparency - Management accountability is enhanced by an audit committee that pays attention. Audit committees also provide "a third set of eyes" to identify issues that might slip by staff and ensure that reports are understandable to the governing board, top management officials and the public, moving the reports from jargon to information. …

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