Benefits of audit committee in Conoy Co
Assistance with financial reporting (no finance expertise)
The executive directors of Conoy Co do not appear to have any specific financial skills – as the financial director has recently left the company and has not yet been replaced. This may mean that financial reporting in Conoy Co is limited or that the other non-financial directors spend a significant amount of time keeping up to date on financial reporting issues.
An audit committee will assist Conoy Co by providing specialist knowledge of financial reporting on a temporary basis – at least one of the new appointees should have relevant and recent financial reporting experience under codes of corporate governance. This will allow the executive directors to focus on running Conoy Co.
Enhance internal control systems
The board of Conoy Co do not necessarily understand the work of the internal auditor, or the need for control systems. This means that internal control within Conoy Co may be inadequate or that employees may not recognise the importance of internal control systems within an organisation.
The audit committee can raise awareness of the need for good internal control systems simply by being present in Conoy Co and by educating the board on the need for sound controls. Improving the internal control ‘climate’ will ensure the need for internal controls is understood and reduce control errors.
Reliance on external auditors
Conoy Co’s internal auditors currently report to the board of Conoy Co. As previously noted, the lack of financial and control expertise on the board will mean that external auditor reports and advice will not necessarily be understood – and the board may rely too much on external auditors
If Conoy Co report to an audit committee this will decrease the dependence of the board on the external auditors. The audit committee can take time to understand the external auditor’s comments, and then via the non-executive director, ensure that the board take action on those comments.
Appointment of external auditors
At present, the board of Conoy Co appoint the external auditors. This raises issues of independence as the board may become too familiar with the external auditors and so appoint on this friendship rather than merit.
If an audit committee is established, then this committee can recommend the appointment of the external auditors. The committee will have the time and expertise to review the quality of service provided by the external auditors, removing the independence issue.
Corporate governance requirements – best practice
Conoy Co do not need to follow corporate governance requirements (the company is not listed). However,
not following those requirements may start to have adverse effects on Conoy. For example, Conoy Co’s bank is already concerned about the lack of transparency in reporting.
Establishing an audit committee will show that the board of Conoy Co are committed to maintaining appropriate internal systems in the company and providing the standard of reporting expected by large companies. Obtaining the new bank loan should also be easier as the bank will be satisfied with financial reporting standards.
Given no non-executives – independent advice to board
Currently Conoy Co does not have any non-executive directors. This means that the decisions of the executive directors are not being challenged by other directors independent of the company and with little or no financial interest in the company.
The appointment of an audit committee with one non-executive director on the board of Conoy Co will start to provide some non-executive input to board meetings. While not sufficient in terms of corporate governance requirements (about equal numbers of executive and non-executive directors are expected) it does show the board of Conoy Co are attempting to establish appropriate governance systems.
Advice on risk management
Finally, there are other general areas where Conoy Co would benefit from an audit committee. For example, lack of corporate governance structures probably means Conoy Co does not have a risk management committee. The audit committee can also provide advice on risk management, helping to decrease the risk exposure of the company. |
