The Role of Audit Committees in the Public Sector
George, Nashwa, The CPA Journal
Recent corporate scandals and legislation like the Sarbanes-Oxley Act have spurred the public to focus on the importance of governance. Governance is not limited to business entities: It is important to public sector entities as well. Public sector entities include state and local governments, federal agencies, public utilities, hospitals, colleges and universities, pension plans, city councils, boards of trustees, legislatures, and boards of governors.
Governance in the public sector deserves the same attention as governance in the corporate sector. While unethical behavior in the corporate sector impacts the shareholders of a company, unethical behavior in the public sector impacts all taxpayers and citizens. The recent scandals involving Long Island school districts illustrate all too well that governance in the public sector can fail.
Audit Committees and the Public sector
Events in the public sector and failures in the quality of government audits led the U.S. Government Accountability Office (GAO) to recommend that public sector entities consider the benefit of using audit committees. In 2003, the GAO revised Government Auditing Standards to require that auditors communicate certain information to the audit committee or to the individuals with whom they have contracted for the audit. Each government entity must designate an audit committee or an equivalent body to fulfill the role of financial oversight. An effective audit committee can increase the integrity and efficiency of the audit process, as well as the system of internal controls and financial reporting.
The audit committee is an integral element of public accountability and governance. It plays a key role with respect to the integrity of the entity's financial information, its system of internal controls, and the legal and ethical conduct of management and employees. An audit committee's responsibility will vary depending upon the entity's complexity, size, and requirements. Typical audit committee responsibilities include approving the overall audit scope, recommending the appointment of the external auditor, over seeing the entity's financial statement and internal controls, helping to ensure that the audit is conducted in a cost-effective manner, and risk management oversight.
Audit committees are an increasingly important component of effective accountability and governance. An audit committee must have three important qualities in order to fulfill its duties: independence, communication, and accountability.
Independence. In the public sector, the structure of entities does not separate the governing authority and oversight responsibility from the day-to-day management. For example, a public university president may be both the chief executive officer and a board member. Public sector audit committees should be independent both in fact and in appearance, and have processes in place to ensure such independence.
Communication. Communication between a governing body and its finance officers can be difficult at times. For example, external financial reporting follows standard principles; however, budgets and expressions of policy are unique to the circumstances of the organization and its jurisdiction. Communication may be complicated when a governing body approves a budget but not the financial statements. The GAO has indicated that audit committees can provide assistance if they have the necessary technical skills in accounting and auditing and are able to communicate with finance officers and auditors on complex issues.
Accountability. An audit committee must be independent to contribute to the integrity of the financial reporting process. An independent audit committee can help reinforce a culture with zero tolerance for fraud. The combination of independent oversight and the technical expertise of audit committee members enhances accountability.
Audit Committees and Internal Controls
Although Government Auditing Standards (2003 Revision) does not include additional internal control standards for financial statement audits, it emphasizes several aspects of internal controls that are important for auditors and audit committees. …