Far from Acceptable: When Audit Committees Don't Stack Up: What's Wrong with Practices Surrounding Audit Committees in This Country? Plenty, According to New Research from Auckland University of Technology's Centre for Corporate Governance

Article excerpt

AN independent audit committee plays a critical role in assuring stakeholders that the information they rely on for informed decision making is of sufficient quality. And while external independent auditors attest to the financial reports, these auditors have themselves come under fire following a string of corporate scandals in the United States, Australia, Europe and Asia. No surprises, then, that corporate regulators have moved swiftly in the United States, United Kingdom and Australia to restore the confidence of the capital market.

Corporate governance regulations in these jurisdictions require that audit committees of listed companies comprise only independent directors, thus locking in independent oversight of financial reports prepared by management. Audit committees are also charged with overseeing the assurance process. These activities include ensuring the scope and quality of the audit is of adequate standard--and that the external auditor is independent--and acting as a mediator during auditor and management discussions.

Such responsibilities are explicitly spelt out in the corporate governance regulations and guidelines in the United States, United Kingdom and Australia.

New Zealand, however, differs with respect to the composition and structure of the audit committee and its responsibilities in four key ways. First, in this country while the formation of audit committees is recommended practice, it is not a legal requirement. Second, the composition and structure of the audit committee are not mandated. When our companies do establish an audit committee they have the discretion to structure it according to their needs and capabilities.

Third, guidelines on the activities and processes for which the audit committee is responsible are quite narrow. Finally, there is scarce mention of the nature and frequency of audit committee meetings.

The primary argument for not mandating or specifying minimum requirements is cost. Corporate management argues the dollars involved in implementing requirements similar to those in other jurisdictions do not justify the derived benefits in a small market such as New Zealand. In addition, corporate management argues the magnitude of financial misstatements in New Zealand does not warrant implementing costly mechanisms. The benefits to be derived are difficult to quantify. A further defence is that the pool of appropriately qualified independent directors is small in New Zealand.

Yet recent research from Auckland University of Technology's Centre for Corporate Governance shows the current New Zealand position is far from desirable. Dr Vineeta Sharma, research student Chun Li Kuang and I have completed a comprehensive study of corporate governance practices in this country based on analysis of New Zealand owned and NZX listed companies in 2004 and 2005.

We selected this time period because the NZX disclosures on corporate governance were effective since the 2004 financial year-end. Although there are more than 200 listed companies, we were able to review the annual reports for just 150 (72 for 2004 and 78 for 2005) due to the poor level of corporate governance disclosures relating to the board generally and to audit committees in particular.

Many companies failed to disclose whether they had an audit committee or reveal information regarding the directors' status (executive, non-executive or independent). This flies in the face of strong recommendations from the SEC on disclosure of the charter and information on the composition and work of committees to assist stakeholders assess the effectiveness of board committees.

In many cases, it is impossible to tell whether an audit committee exists and to assess the composition of the board and its sub-committees. If an audit committee does not exist, companies ought to disclose the alternative mechanism that assumes the roles and responsibilities of the audit committee. …


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