• Effective Audit Committee Guide

The audit committee should be responsible for making a formal recommendation to the board that the audited financial statements be approved. In addition, the external auditors should discuss their judgment about the quality, not just the acceptability, of the organization’s accounting principles with the audit committee. Moreover, auditors are required to communicate significant issues identified to the audit committee. The audit committee must be active in asking knowledgeable and probing questions about these matters and not merely listen to presentations by the auditors and management.

Business transactions are increasingly complex, making it difficult to understand the proper accounting treatment or related economic risks.
 
  • Generally, an individual who has past experience in finance and accounting along with the requisite industry knowledge can be a crucial and invaluable addition to the audit committee.
  • The body of accounting rules and complexity of such rules is increasing dramatically, coupled with the potential convergence to one set of worldwide acceptable accounting standards (i.e., IFRS).

We are all acutely aware of the accounting and disclosure complexities faced by organizations today. This issue is only going to become increasingly more challenging as the FASB and IASB continue to set aggressive agendas for release of new standards. The number of expected major changes is unprecedented and causes great concern that such changes will consume significant amounts of management time and will carry a high risk of mistakes. Organizations will be expected to disclose the impact of these changes and audit committees will need to “get up to speed” quickly on changing accounting rules that cover a broad range of matters from revenue recognition to accounting for leases. For IASB and FASB project updates, refer to http://www.ifrs.org/Home.htm and http://www.fasb.org/home, respectively.

Coupled with the release of complex technical accounting and reporting guidance is the expectation of more transparency in disclosure by regulators and stakeholders.

► BDO INSIGHT
We believe boards need to assess the specific and unique circumstances and experiences of the organizations they serve in selecting candidates for service on committees of the board. The selection of audit committee members, and particularly the decision regarding whether to include more than one financial expert, must take into account various factors, including weighing the risks and complexities of the financial reporting of the organization as well as the current composition of the audit committee, along with careful consideration of its strengths and perceived weaknesses. The board needs to consider the broad experiences – financial, industry, leadership, etc. – that potential candidates bring to the table, and financial expertise is one of many attributes that need to be weighed. Furthermore, in considering whether an audit committee should have an “accountant” in the mix is dependent on the types of experiences that all members, as a group, bring to the table. However, experience in accounting matters and the propensity to remain current in the increasingly complex and mounting accounting technical literature are attributes that should be weighed heavily in the candidate selection process.


Liability of Financial Experts

An audit committee financial expert has no greater obligations or liability than the members of the audit committee and board of directors who are not designated as financial experts, and the presence of an audit committee financial expert does not reduce the other members’ obligations or liability. However, we advise audit committee members to seek advice from legal counsel on questions of legal liability.

Resources

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Contacts

Andrea Espinola Wilson.
Andrea Wilson Managing Partner; Industry Specialty Services National Co-Leader, Nonprofit & Education Practice 703-752-2784
Adam Cole.
Adam Cole Managing Partner; Nonprofit & Education Advisory Practice National Co-Leader 212-885-8327
Laurie De Armond.
Laurie De Armond Assurance Office Managing Partner; Institute for Nonprofit Excellence Executive Director 703-336-1453
Marc Berger
Marc Berger National Director, Nonprofit Tax Services 703-336-1420
Lee Klumpp
Lee Klumpp National Professional Practice Partner – Nonprofit and Government Industries 703-336-1497
See all contacts

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