ACCT 6380 Internal Audit

The report aims to look into the aspect of whether all corporations should use independent audit committees. An audit committee is a committee comprising of non-executive directors, which views a company’s day to day affairs in a completely separate and independent way and also collaborate in an effective manner between the main board of directors and external auditors.

Their role involves, standing objectively in the loophole between management, the external auditors and people who provide the capital to make things happen. This helps to ensure the people providing the capital receive accurate, complete information in a timely manner, which is subjected to a significant level of scrutiny. The report concludes that all organizations should have independent audit committees to for better transparency and accountability.

Introduction

The report is aimed to look into the question, whether all organizations should have independent audit committees identifying all the aspects which an audit committee generally covers and the benefits which they provide for an organization. Audit Committee is a committee consisting of non-executive directors, who is responsible for viewing the company’s affairs in a completely separate and independent manner, hence collaborates effectively between the group of external and the company’s board of directors (Badolato, Donelson & Ege, 2014).

As per the requirement of the report, all organizations should have independent audit committees to manage their financial affairs in an effective manner. The various advantages like managing funds in an effective manner, which independent audit committees provide would be discussed in detail. The report concludes that independent audit committees should be used by each and every organization as they help in providing transparency to business models and manage funds and resources to the fullest extent.

Discussion

Audit Committee

An audit is conducted through a systematic and independent examination of accounts, books, related documents, statutory compliances and all other vouchers of an organization for ascertaining, to what extent the financial statements and non-financial disclosures help present a true and fair view of the concern (Bierstaker et al., 2012). Audit Committee is an operating committee consisting of non-executive directors, which is able to take care of all the activities mentioned board of directors of an organization. They are responsible for taking charge of overseeing financial reporting and disclosure in a manner which would present a true and fair view of an organization.

Advantages of having Independent Audit Committees in organizations

Each and every organization should have audit committees in place and the importance of audit committee is highlighted through looking into the advantages, which the committee help bring into the system. The various advantages are discussed below:

1. An independent audit committee helps in presenting a true and fair view of the financial affairs of an organization.
2. Establishment of independent audit committees help in ensuring strong governance, through which companies can minimize risk arising from fraud, theft and misappropriation of funds (Chan, Liu & Sun, 2013). Misappropriation of funds is a very common trend in organizations, where people entrusted with the responsibility of fund management, makes use of the funds to serve his own purpose.
3. The audit committees make sure to independently monitor and oversee operations taking place in an organization, thereby provides customers with the assurance that their best interests would be served. This in turn, helps in building trust among the customers as they feel that organizations would serve their best purpose and provide them with a sense of satisfaction.
4. Setting up of audit committees is essential from the point of view of building the corporate social responsibility within organizations (Ghafran & O'Sullivan, 2013). Corporate Social Responsibility is an initiative taken by organizations to effectively assess and take full responsibility for the company’s effects on environment and the society in general. Customers and investors are the assets for any organization who play vital roles not only in the smooth functioning but also in the overall progress, which they look to make. Only by providing products and services in an effective manner, through charging the right sort of prices, can any organization look to transparently carry out their businesses and hence build the trust and faith of the customers (Li, Mangena & Pike, 2012).
5. Global market is extremely competitive, hence pressures keep on mounting upon organizations, having fewer resources to tackle the level of competition and go ahead in their path to progress. The committees take a fresh look into the internal happenings that take place in organizations by keeping a close watch over all the activities. Their professional approach helps in assessing the extent of corporate level risks that exist and also stress upon the areas where higher risks are involved (Okpala, 2012).
6. Audit Committees do not just look after the overall working of an organization and take into account the level of organizational and operational risks involved with them but they also provide the necessary work plans to reduce the level of risks. This allows organizations with the abilities to tackle business risks arising from global level and put themselves in good stead to be in a position from where they can counter situations and develop themselves by carrying out operations in an efficient and effective manner.
7. In addition to creating of appropriate work plans for reducing the level of risks in organizations, good independent audit committees would complement the audit activities which currently exist and thereby enhance the all-round quality of the organization’s governance.
8. Just like, how corporate social responsibilities are enhanced through the activities, which get carried out by independent audit committees, in a similar manner, they help organizations in doing businesses in an ethical manner (Zaman & Sarens, 2013). Ethics is of paramount importance for any organization to follow, where they are guided by the set of principles through certain programs, policies and decisions for the business. Audit committees allow organizations to conduct their businesses in a thoroughly professional manner by taking care of the internal working of an organization.

Disadvantages of having Independent Audit Committees in organizations

There are certain disadvantages or loopholes which prevent certain organizations from having independent audit committees in organizations:

1. The management might feel that the purpose of audit committee is to catch them out and hidden activities related to mismanagement and misappropriation of funds, if any might get disclosed (Sun, Lan & Liu, 2014).
2. Formation of two-tier board of directors, which might lead to hassle
3. Organizations would have to bear the additional cost in terms of the time which the activities would take.

Conclusion  

Now that the advantages and disadvantages of establishing independent audit committees in corporations have been discussed, the report can conclude that corporations should implement independent audit committees as they set to gain more through setting up of these committees than they could lose. The activities carried out by audit committees would only help in providing organizations with the much needed insight into any sort of misdeeds, which might have taken place, thus enabling them to create a good image in front of the customers.

References

Badolato, P. G., Donelson, D. C., & Ege, M. (2014). Audit committee financial expertise and earnings management: The role of status. Journal of Accounting and Economics, 58(2), 208-230.

Bierstaker, J. L., Cohen, J. R., DeZoort, T., & Hermanson, D. R. (2012). Audit committee compensation, fairness, and the resolution of accounting disagreements.

Chan, A. M. Y., Liu, G., & Sun, J. (2013). Independent audit committee members’ board tenure and audit fees. Accounting & Finance, 53(4), 1129-1147.

Ghafran, C., & O'Sullivan, N. (2013). The governance role of audit committees: reviewing a decade of evidence. International Journal of Management Reviews, 15(4), 381-407.

Li, J., Mangena, M., & Pike, R. (2012). The effect of audit committee characteristics on intellectual capital disclosure. The British Accounting Review, 44(2), 98-110.

Okpala, K. E. (2012). AUDIT COMMITTEE AND INTEGRITY OF FINANCIAL STATEMENTS: A Preventive Mechanism for Corporate Failure. Australian journal of business and management research, 2(8), 32.

Sun, J., Lan, G., & Liu, G. (2014). Independent audit committee characteristics and real earnings management. Managerial Auditing Journal, 29(2), 153-172.

Zaman, M., & Sarens, G. (2013). Informal interactions between audit committees and internal audit functions: Exploratory evidence and directions for future research. Managerial Auditing Journal, 28(6), 495-515.