Fundamentals for audit committees – Canadian Government Executive

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May 7, 2012

Fundamentals for audit committees

CGE Vol.13 No.9 November 2007

Independent audit committees are an integral part of the Government of Canada’s efforts to improve accountability. The Treasury Board Secretariat’s Policy on Internal Audit and its Directive on Departmental Audit Committees indicate that audit committees should include members from outside the public service with extensive experience who can offer independent oversight, ongoing objective assessments and professional advice for the deputy head and senior management team.

Based on research we have done in conjunction with the Institute of Internal Auditors Research Foundation, departments should concentrate on three fundamentals: setting a clear vision; engaging the right people; and establishing an effective management structure to let the committee do its work.

The Mandate
A clearly articulated vision for the Independent Audit Committee is needed so that time is not misspent, focus remains on important issues, and the value of their expertise and experience is harvested. Ultimately, if not properly focused, the value of the committee will be called into doubt.

To avoid this, the deputy head should meet with the committee at the earliest opportunity to establish a mandate describing the committee’s role, structure, processes, membership requirements, activities and goals for the year. For existing committees, the mandate should be discussed with the deputy in light of the Accountability Act, the new Internal Audit Policy, and the directive on audit committees.

It is important to update the mandate annually in line with new directions from government, and to outline new goals based on the committee’s maturing knowledge and experience.

The mandate is a guide to the committee’s activities during the year and to a review of its performance at yearend. It is a communication tool to report on activities to the deputy head, to validate with stakeholders to ensure their objectives are being met, and to display the department’s investment in improving accountability.

The Team
The appointment of suitably qualified members is crucial. External members can help the committee address its new roles and responsibilities; internal members can educate external members regarding the department, its operations and culture and the role of audit committees in government.

Departments need to develop criteria for the selection of new members: the skills, capabilities, experience, financial acumen and independence required. They should also examine the composition and lifecycle of the whole committee in terms of departmental, public sector and financial knowledge to ensure skills and competencies are built on an ongoing basis.

A nominating body of existing committee members and the deputy head should validate potential members. Diversity among members is desirable, as a uniform point of view could lead to over-emphasis in one direction.

Education programs can fill gaps in members’ knowledge of finance and public sector management, and experts within the committee can guide less experienced members in understanding financial issues or operational processes. Comprehensive orientation programs can provide new members with systematic exposure to aspects of the department and public sector environment.

Treasury Board Secretariat’s directive advises that by April 1, 2009 all audit committees must have a majority of external members. It also says, “members of the audit committee should be free of any real or perceived conflict of interest.” The deputy head and the senior management team need to define independence and communicate the definition internally and externally to ensure awareness of and adherence to the criteria.

In the interests of transparency and stakeholder awareness, profiles of members of the committee should be publicly available.

Managing Activities
Committees should seek information regarding departmental financial processes, operations and organizational structure; interview key staff; and have access to legal and financial opinions. If these requests are not met in a timely manner, committees cannot offer pertinent insight and advice.

If committee meetings are not well organized or attended, time will be misspent and important items may not be addressed. Meetings should be sufficiently regular to allow members to review information on a timely basis, but not so frequent as to overwhelm members with demands. Agendas should be issued early so that members can prepare; agendas should ensure sufficient time to discuss vital issues.

The deputy head should consider regular briefings regarding financial reporting, risks and controls, operations and organization. Regular dialogue between the committee and the deputy head and senior management team is critical. There is a fine balance between being informative and being directional, the department and the committee should consider what information should be pushed to the committee and what information will be pulled by it.

Roxanne Anderson, MBA, CA, and Claire Lake, MBA, CA, are partners with the federal public sector practice of PricewaterhouseCoopers. Roxanne is a member of the Board of Governors of the Canadian Comprehensive Audit Foundation.

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