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

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

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

4. 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.

5. 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

6. 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

7. 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

8. 2.1 Governance Requirements (Cont)
Seven primary characteristics of good governance: King Report 2002
Discipline
Transparency
Independence
Accountability
Responsibility
Fairness
Social responsibility

9. 2.2 New Legal Requirements
Local Government: Municipal Finance Management Act, 2003 (Act 56 of 2003)
Section 166:
Establishment
Duties
Requirements
Composition

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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)

34. 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

35. THANK YOU