Law & Governance
Importance of Independent Audit Committee
"Do we have an independent audit committee?"
"Are the terms of reference of our audit committee in keeping with developing best practices?"
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
- Specifically, the audit committee needs to assure itself
- the external auditors are independent from the
- 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.
- the external auditors are independent from the corporation;
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.
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