Juvenal is a large firm with more than 3000 employees, the external auditor of the firm recommended that the firm should conduct audit committee, in this case, Bob was followed to consider its role, but unfortunately, he was not known about the membership, functions and benefits of the audit committee. By considering this aspect, the present study is based on the proper justification of membership, functions and benefits of the audit committee will be conducted so as to help Bob in getting familiar with the same, and carry on his role smoothly. The study also covers the regulation and oversight of audit committee to ensure the audit firms to conduct work in better quality, while considering the role of the audit committee in ensuring that the auditors conduct their work in an effective manner.
An optimal audit committee can offer various benefits to firm which can come in the form of providing actionable insights to inspect and improvise the financial reporting and practices, wherein audit committees conduct meeting with the financial officers for maintaining the efficiency in the controls and outer financial reporting of the organization (Cohen, Krishnamoorthy & Wright, 2017).
This is highly concerned with the internal reports, financial strategies and operational issues. In addition, an effective audit committee can help in creating and marinating better anti-fraud programs in Juvenal, with the conducted insights in terms with the issues of operations and management, the audit committee has a great role in working with auditors to create and review the fraud prevention program in organization as a whole while making sure that proper investigations are taken into account in case the fraud is exposed. This also forms compliance programs, code of conduct and detailed ethics so that no unethical practices are involved. Moreover, the audit committee will benefit the Juvenal in enhancing the internal audit function, by forming an optimal organizational structure that possesses internal auditing team that reports to the audit committee in a direct manner that makes a contribution to the entire integrity (Pizzini, Lin & Ziegenfuss, 2014).
By this, the Juvenal firm will be able to satisfy the responsibilities of finance and compliance while assuring that there is proper adjusting of audit practices and internal controls accordingly. Along with this, the optimum use of audit committee will ensure oversee of the external audit of the organization, in which the audit committee has met with the external auditors to check the services so that there is the maintenance of independence among the managerial team and external auditors of the firm (Means, 2017). Additionally, an efficient audit committee can reinforce the credibility with the stakeholders, it aid in communicating about the independence, trust and relevance, it also promotes confidence.
The audit committee must be primarily based on the UK Corporate governance code and FRC risk guidance (Icaew, 2018). The membership of audit committee is chosen number of members of the board of directors of the company, in the Juvenal the Board of Directors is Bob an expert in Human Resource Management and, as a Non-Executive Director, and Steve, the Director of Finance, whose roles and responsibilities will be inclusive of assisting auditor in remaining independent of management. For Bob to interpret the functions of audit committee effectively, it can be explained that the main function of the audit committee is to conduct audit overseeing of the books and records of association and to review the internal financial process and control of the association (Alzeban & Sawan, 2015). Being a part of its function, the audit committee provides a recommendation to the full board in regards to the termination, selection and retention of an independent firm to carry out the services of auditing.
Importance of the audit committee has been enhanced after the detailed examination of the US Sarbanes–Oxley Act of 2002 (SOX), which was passed in the consequences of the affairs of Enron and Tyco and related corporate scandals (Out-Law. com, 2018). However, there was the absence of the corporate governance examination that would be complete with no reference to SOX and an acknowledgement that there is a little circumstance where it might impact UK companies and their directors.
To maintain a high audit quality, it is significant to comply with applicable rules, regulation and laws, inclusive of viable and reliable professional standards. In the UK, wherein the Juvenal is operating, the Professional Oversight Board is the oversight body. To be competent to conduct a high-quality audit, it is totally based on the independent auditors and the audit firm to possess strong auditing skills formed by efficient training and reliable experience. There must be an appropriate flow of communication and the character strength doe auditing approach with the high scale of professional scepticism (Malsch & Salterio, 2015).
In addition, the independent auditors are required to state and justify that they consider the maintenance of higher integrity, independence, consistency, objectivity standards with the underlying values alongside. Similarly, the auditors must comply with the high professionals and principles of ethics, inclusive of integrity as well as independence (Raiborn, Butler, Martin & Pizzini, 2017). To this note, the auditor must avoid all the commercial and individual interest that can conflict or breach with their delegated roles and responsibilities. In this way, the audit firm must support a suitable individual mindset meant for auditor and a fitted audit culture of the firm. The high-quality audit is totally based on the structures of legal and regulatory bodies, containing the professional standards that are reliable to the financial statements and audit. Better quality control of the audit is engaged with the audit quality risks and forming necessary controls at the level to mitigate the same, by considering the controls at the level of the audit firm. In accordance with the same, auditors are likely to comply with principles provided to maintain ethics and professional standards, i.e. objectivity and integrity (Financial Reporting Council Financial Reporting Council, 2015). Auditors are expected to be highly experienced, knowledge, skills regarding the audit and business. This is inclusive of the industry, the corporate operations and environment and regarding the regulatory and legal structures that support their responsibility being as a statutory auditor and the financial reporting procedure and output of the firm. Most significantly, the mindset, knowledge, skills, character, culture of the auditor and their quality controls are crucial to sustaining them in taking an objective, integrative and reliable judgments, in all auditing stages. Therefore, these judgements are critical to deliver higher audit quality, support audit opinions and allow them to make a win-win situation while reporting.
Firms operating in the regulated audit area must comply with the Audit Regulations and Guidance which are namely; ICAEW (The Institute of Chartered Accountants in England and Wales) ICAI (The Institute of Chartered Accountants in Ireland operating as Chartered Accountants Ireland), ICAS (The Institute of Chartered Accountants of Scotland).
These regulatory bodies state the rules that are set out on the proper regulation of auditors, and the guidance they are required to follow. The purpose of the audit regulations is to ensure that there is adequate maintenance of high standards of audit work by registered auditors. The related law needs that the rules in regards to conducting the audit work are required to be written down by the independent body (Icaew, 2018). Therefore, the audit firm has to apply the ethical standards, quality control and auditing all through, and the adopted standards are the International Standards on Auditing (UK and Ireland), the International Standards on Quality Control (UK and Ireland) and the ethical standards.
The board is required to create formal as well as a transparent arrangement for taking into account the manner they must apply the corporate reporting, principles of internal control, maintaining a strong relationship with the auditors of company and risk management. The major roles played by the audit committees are provided as: it works to check the integrity of the corporate financial announcements, structure and statements (OutLaw.com, 2018). It role lies in reviewing the internal financial control and risk management system while reviewing and monitoring the functions of internal audit. The role of the audit committee is to recommend either appointment or replacement of the outer auditors and to monitor the efficiency of their work. It also plays a role in developing and implementing the policy on the implementation of the auditors meant for non-audit services. The audit committee is considered as the guardian of the company financial statement’s integrity. This standard oversight of the corporate account states that the audit committee has a significant role in investigating the internal financial control of the company, and simultaneously reviewing them along with operational activities and making sure that there is adequate risk management system, where a corporation has an audit function based internally, the audit committee will be required to expand its role to monitor to internal audit. The committee has placed certain particular duties in regards with the external auditors, it makes recommendations on the auditor appointment to the board and makes approval of their fees and other related terms by which their retaining is done (Contessotto & Moroney, 2014). In addition, the audit committee also has a major role in the prevention of fraud. It is required to have confidence that act as opportunities all across the company and employee, and conduct reporting of abuses and misconduct. This might work by providing the employee with comprehensive details for the members of the committee for use is there is a failure of avenues. The role of the audit committee is to review with the help of independent auditors, by monitoring the policy adequacy on yearly terms and acquire the approval of Board of any policy revisions (Badolato, Donelson & Ege, 2014). The audit committee also reviews the standard extent and scope of the general audit of the independent auditor and consider the audit results with the auditors as well as managerial and regulatory authorities. The audit committee is also tasked with a review with yearly engagement letter inclusive of necessary arrangements while reviewing the important accounting practices and policies of the firm and the controls of financial reporting with their adequacy in mind (Lee & Fargher, 2017). Most of the company have established private fraud system for employees, and the other trusted parties that can provide the information to the right individual at the right time. Thus, the audit committee’s role is extremely important in maintaining good governance overall.
Considering the real-life case of the Tesco and the consequences of not adhering to the auditing professional standards, the company, wherein two former officials of Tesco Plc succeeded in the dismissal of crime-fraud in regards with the 2014 accounting scandal that provoked a boardroom house-cleaning as well as an overhaul of the supplier relations of the grocer of UK The (Guardian, 2018). The case was held that the retailer did the income overstating by 246 million pounds ($313 million), which further washed 2 billion pounds of the market value of the company. Lastly, the retailer made agreements to make payment of 214 million pounds to resolve the problems of regulatory in the accounting scandal.
Conclusion
On the basis of above analysis, the conclusion can be drawn that audit committee is required to be well marinated by the firm, with the qualified and experienced auditors in order to prevent frauds and maintain proper internal control and financial statements. The effectiveness of the audit committee is related mainly with the effectiveness of the Board of directors and upper management. In this way, Bob and Steve must not wait for the committee to request for information. It is required to be ensured by them that there is adequate information provided to audit committees timely and they must initiate to supply information to it.
References
Alzeban, A., & Sawan, N. (2015). The impact of audit committee characteristics on the implementation of internal audit recommendations. Journal of International Accounting, Auditing and Taxation, 24, 61-71.
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(2-3), 208-230.
Cohen, J., Krishnamoorthy, G., & Wright, A. (2017). Enterprise Risk Management and the Financial Reporting Process: The Experiences of Audit Committee Members, CFO s, and External Auditors. Contemporary Accounting Research, 34(2), 1178-1209.
Contessotto, C., & Moroney, R. (2014). The association between audit committee effectiveness and audit risk. Accounting & Finance, 54(2), 393-418.
Lee, G., & Fargher, N. L. (2017). The role of the audit committee in their oversight of whistle-blowing. Auditing: A Journal of Practice & Theory, 37(1), 167-189.
Malsch, B., & Salterio, S. E. (2015). “Doing good field research”: Assessing the quality of audit field research. Auditing: A Journal of Practice & Theory, 35(1), 1-22.
Means, G. (2017). The modern corporation and private property. Routledge.
Pizzini, M., Lin, S., & Ziegenfuss, D. E. (2014). The impact of internal audit function quality and contribution on audit delay. Auditing: A Journal of Practice & Theory, 34(1), 25-58.
Raiborn, C., Butler, J. B., Martin, K., & Pizzini, M. (2017). The Internal audit function: A prerequisite for good governance. Journal of Corporate Accounting & Finance, 28(2), 10-21.
Financial Reporting Council Financial Reporting Council, (2015). Audit Quality Practice aid for audit committees. Retrieved from < https://www.frc.org.uk/getattachment/1738ea4e-167a-41e5-a701-f169e6b7e264/Audit-quality-practice-aid-for-audit-committees-May-2015.pdf>.
Icaew, (2018). Audit Regulations and Guidance (effective November 2013 – 16 June 2016). Retrieved from < https://www.icaew.com/library/subject-gateways/corporate-governance/audit-committees>.
Out Law. com,. (2018). The audit committee – the UK Corporate Governance Code. Retrieved from <https://www.out-law.com/page-8219>.
The Guardian, (2018). Two Tesco directors cleared of fraud as judge labels case ‘weak’. Retrieved from < https://www.theguardian.com/business/2018/dec/06/two-tesco-directors-cleared-of-false-accounting>.
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