AUDIT COMMITTEES COMPOSITION, MANDATE AND OPERATION MARE-LISE FOURIE (FIMFO)Honorary life member

CONTENT SECTION 1 INTRODUCTION SECTION 2 WHY? SECTION 3 WHAT? SECTION 4 HOW? SECTION 5 CONCLUSION

SECTION 1 INTRODUCTION Local Government Transition Act Second Amendment Act, 1996 (Act 97 of 1996) New legislation

SECTION 2 WHY DO WE NEED AUDIT COMMITTEES? 2.1 Governance requirements Any organisation is defined by its purpose. For a municipality it is most likely to be the provision of the highest level of services to the community it serves in a sustainable way and at the most economical rate.

2.1 Governance Requirements (Cont) Objects of local government – Section 152 of the Constitution Provide democratic and accountable government Ensure the provision of services to communities in a sustainable way

2.1 Governance Requirements (Cont) Governance represents the means by which direction and control are applied to stewardship of an organisation’s assets – tangible and intangible, financial and non-financial - in the pursuit and delivery of the primary objective of sustainable value creation

2.1 Governance Requirements (Cont) Governance is therefore essentially a function of – Leadership and direction Appropriate risk management and control The manner in which meaningful disclosure is made

2.1 Governance Requirements (Cont) Seven primary characteristics of good governance: King Report 2002 Discipline Transparency Independence Accountability Responsibility Fairness Social responsibility

2.2 New Legal Requirements Local Government: Municipal Finance Management Act, 2003 (Act 56 of 2003) Section 166: Establishment Duties Requirements Composition

SECTION 3 WHAT IS AN AUDIT COMMITTEE? Definition An audit committee is an independent advisory body appointed by a council and tasked with specific responsibilities as set out in an audit committee charter approved by a council

What is an audit committee? (Cont) Content of an audit committee charter: Objectives Functions and responsibilities Authority Organisational requirements Reporting requirements Relationship with council, management and internal and external auditors

3.1 What are the objectives of an audit committee? To assist the council in fulfilling its oversight responsibilities To review: Financial reporting process System of internal control and management of financial risks Audit process Compliance To maintain effective working relationships with council, management, auditors

3.2 What are the duties/responsibilities of an audit committee? Key performance areas: Financial reporting: - Timely, objective and complete disclosures - Financial position - Results of operations, plans and long-term commitments

Key performance areas (Cont) Corporate governance: Compliance Ethics Effective and efficient control systems to prevent fraud, etc. Governance by an audit committee implies oversight not management

Key performance areas (Cont) Corporate control: This includes control over key financial and operating risk areas and systems of internal control Objectives of internal control: Reliability and integrity of information Compliance Safeguarding of assets Economical, effective and efficient use of resources Performance management

Legislated duties of an audit committee Section 166 of the MFMA: Advise on matters relating to the following: Internal financial control, internal audits Risk management Accounting policies Adequacy, reliability and accuracy of financial reporting and information Performance management Effective governance Legislative compliance Performance evaluation Other

Legislated duties of an audit committee (Cont) Review AFS with regard to the following: Financial position Efficiency and effectiveness Compliance Respond to issues raised by the Auditor-General Investigations

3.3 What is the authority of an audit committee? To obtain/seek/gather information from internal or external sources To request/obtain outside legal or other professional advice To ensure attendance of officials/councillors To initiate special investigations

SECTION 4 HOW DO AUDIT COMMITTEES OPERATE? Organisational arrangements New member orientation Reporting responsibilities Evaluating the performance of the audit committee Building better working relationships

4.1 Organisational arrangements Appointment of committee members Size of committee Membership requirements Term of office Remuneration of members Attendance of officials Arrangements for meetings

4.1 Organisational arrangements (Cont) Appointment of members: Majority of members not in the employ of the municipality No councillors Chairperson – not employee Size of the committee Large enough to represent a balance of views but small enough to operate efficiently Size of the organisation to determine – 3 to 6

4.1 Organisational arrangements (Cont) Membership requirements: Critical success factor for performance Accounting or related financial management expertise Legal background Ability to read and understand basic financial statements

Membership requirements (Cont) Qualities that each member should possess: Integrity Independence Dedication of time and energy Understand local government business, risks and control Knowledge in financial matters Good communication skills Inquisitiveness and independent judgement Chairperson should possess strong leadership qualities and ability to promote effective working relationships

Term of office of members Normally varies between 1 and 3 years When considering – weigh following considerations: Continuity Freshness Staggered terms to balance above considerations

Remuneration of members Compensate members not in employ: Re-imbursement of expenses Negotiated fee per hour Tariffs applicable to the Office of the Auditor-General

Attendance by officials and other parties Standing invitation: Accounting officer Chief Financial Officer Internal auditor External auditor Representative of the Office of the Auditor-General Other person or employee

Meetings Number of meetings: At least four times per year Actual number influences by objectives and scope of activities Generally correspond with major phases of financial and performance reporting and external and internal audit cycles Agenda Quorum Secretarial functions Minutes

4.2 New member orientation New committee members should be provided with sufficient Information and training with regard to at least the following: Audit committee charter Municipality’s financial and operational controls Accounting policies Municipal operations and areas of risk Background and qualifications of senior executives and financial management Responsibilities of the internal audit function Internal audit plan Scope of external audit

4.3 Reporting responsibilities Duty to report to council on the following: Summary of committee activities Relevant recommendations Matters that impact on the financial condition os the municipality Matters that impact on the affairs of the municipality

4.4 Evaluating the performance of the audit committee Done through self assessment with inputs from management and internal and external audit teams Chairperson to evaluate performance of individual members Council to evaluate performance of chairperson Evaluation criteria: Expertise and know how Attitude, objectivity, judgement and independence Understanding of and commitment to duties Attendance of meetings Timely responses Knowledge of municipality and its objectives Corrective steps if required

4.5 Building better working relationships Effective oversight requires the audit committee to ask difficult questions and expect reasonable answers A strong working relationship can be established by the following: Developing and maintaining a code of conduct Encouraging ongoing communications

SECTION 5 CONCLUSION ‘In the context of corporate governance, a proper balance needs to be achieved between the freedom to manage, accountability and the interest of different stakeholders’ The King Report

CONCLUSION (Cont) ‘The mere existence of an audit committee is not enough. The audit committee must be vigilant, informed, diligent and probing in fulfilling its oversight responsibilities’ Report of the National Commission on Fraudulent Financial Reporting (Treadway Commission)

CONCLUSION (Cont) An audit committee should never be seen or treated as a necessary evil but rather as a trusted ally Its greatest virtue is its independence which allows it to challenge management decisions and evaluate corporate performance from a completely free and objective perspective

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