Law & Governance

Law & Governance November -0001 : 0-0

Importance of Independent Audit Committee

Michael Watts and Kathy O'Brien


Recent governance studies are putting great emphasis on the critical role of the audit committee in a corporation's risk management and financial control systems. Although these reports are targeted at the for-profit sector of publicly offered corporations, the principles apply equally to not-for-profit and charitable corporations. A charitable corporation must be able to withstand significant scrutiny with respect to its financial integrity, in order to ensure that stakeholders (such as the Ministry of Health and Long-Term Care, Canada Customs and Revenue Agency, the Public Trustee, and the community at large) - like public company shareholders - are receiving value for their "investment" in the corporation.
All hospital boards should be asking themselves:
"Do we have an independent audit committee?"

"Are the terms of reference of our audit committee in keeping with developing best practices?"

Saucier Report

The Saucier Report (formally entitled Beyond Compliance: Building a Governance Culture by the Joint Committee on Corporate Governance) of November 2001 contains an entire section devoted to the proper composition and mandate of the audit committee.

The audit committee as envisioned by Saucier is proactive, critical, objective, financially literate and independent from the corporation's management. It engages in full and frank discussion with the external auditors about management's competence and judgment. It is a key player in the Board's accountability to its shareholders for the financial viability and integrity of the corporation.

The Saucier Report makes the following specific recommendations with respect to the composition and mandate of the audit committee:

  • Audit committees should be composed solely of outside directors (i.e., no members of management).
  • All members of the audit committee should be "financially literate" and at least one member should have accounting or related financial expertise. It is up to each board to define and set criteria for "financial literacy".
  • Audit committees should adopt a formal written mandate that is approved by the full board and that sets out the scope of the committee's responsibilities.
  • Specifically, the audit committee needs to assure itself that:
    • the external auditors are independent from the corporation;
    • the external auditors are satisfied that the accounting estimates and judgments made by management reflect an appropriate application of GAAP; and
    • it has developed a relationship with the external auditors that allows for full, frank and timely disclosure of all material issues, with or without management as appropriate in the circumstances.

Canadian Council of Chief Executives

In September 2002, the Canadian Council of Chief Executives ("CCCE Report") released a statement on governance best practices entitled Governance, Values and Competitiveness: A Commitment to Leadership, which also makes significant recommendations, consistent with the Saucier Report, about the critical role of the audit committee. Again, financial literacy, oversight, and full access to company books and records and to outside resources and advice are emphasized. Also, non-audit services that the auditor provides to the organization should be identified and disclosed to ensure the external auditor is independent in fact and in appearance.

U.S. Developments - The Sarbanes-Oxley Act

The United States government has recently enacted legislation (the Sarbanes-Oxley Act), reflecting the response to a recent series of highly publicized business scandals, pension losses and bankruptcies. The legislation aims to improve corporate governance standards, in part by requiring all members of the Audit Committee to be "independent" and to have the authority to hire independent counsel and advisors. In addition, the Sarbanes-Oxley Act prohibitions an organization's auditors from performing certain non-audit services for that organization.

About the Author(s)

Michael Watts and Kathy O'Brien are lawyers practising exclusively with health care clients in the Health Law Group of Cassels Brock.


Be the first to comment on this!

Note: Please enter a display name. Your email address will not be publically displayed