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  • Audit Committees as a cornerstone of corporate governance

    Introduction

    Audit committees play an important role in the enhancement of corporate governance which is being recognised widely in recent years due to the collapse of organizations that did not use Corporate Governance. The study aims to discuss and to search the role of the audit committees in corporate governance as a cornerstone in the implementation process. The study is focused on the Saudi Arabian environment. Corporate governance as indicated in the study is used as a system of controlling and directing organizations. The aim of the introduction of corporate governance is to make the operations of the organization to be conducted in a professional way by enhancing disclosure of the financial statements and transparency. Corporate governance also helps in protecting the rights of the shareholders. Another aim of corporate governance is to provide a legal and efficient regulatory framework and to facilitate the functioning of the board. Corporate governance contains a framework of rules, processes, relationships and systems which are used by the authority to control organizations or corporations.

    The audit committees in the corporate governance are placed between the external and the internal auditors and the board of the corporation. The Audit committee are considered to be the cornerstone of a credible and a good financial system. They have been given responsibilities that they are supposed to fulfil and the guidance. They boost the confidence of the company in financial reporting and maintain the credibility of the financial reporting of the internal control. For the Audit committee to be effective in the corporate governance they are supposed to be independent and be made up of non executive directors. The audit committees are selected on the basis of expertise and knowledge.

    Statement of the problem

    To increase confidence in financial statements in Saudi Arabia there was a resolution that required the public companies to have audit committees. There has been very little that the audit committee has been achieving according to a research that was conducted in 2004 and this was associated with the problems that they had. The audit committees have been experiencing problems in Saudi Arabia because they have heard few meetings and they did not have a working agenda or a charter. The other problem is that the members of the committees consisted of the board members and the executive directors. Other members in the board were chosen by the basis of friendship and that is why the committees had limited effects.

    Purpose of the study

    The purpose of the study is to understand the role of audit committee as an important part of the corporate governance and also to differentiate it from the corporate management. Corporate governance is strategy oriented and it is concerned with the operations of the company. It assumes an open system unlike the corporate management because it deals with the things that are outside the company and not like the corporate management which assumes a closed system. The study also helps to know the roles of the Audit Committee and their importance in the corporate governance.

    Literature review

    The corporate governance contains a framework of governance which includes the internal audit, supervisory board, audit committee, disclosure of information, risk management framework and statutory audit. The importance of the audit committee is evident because it is a part of the governance framework in corporate governance and thus acts as a cornerstone for its implementation.

    The audit committees have responsibilities both to the shareholders of the company and the management. In public companies there is a separation between the ownership of the company and the people who control the company. The audit committee acts as agencies between the shareholders of a company and the management being that they make sure that the management of the company takes care of the interests of the share holders. They help in enhancement of the agency theory.[1] Corporate governance ensures that the interest of the shareholders and the people in control is taken care of. This is evidence that the audit committee plays an important role in the corporate governance because they ensure that there is a healthy relationship between the shareholders and the managers.

    The audit committee is important in Saudi Arabia because it has been in the senior board committee. It has been given the responsibilities of governance in the financial reporting and also in corporate reporting and disclosure. The evidence that the committee is important and acts as a cornerstone in the implementation of the corporate governance in Saudi Arabia is seen in the role they play. The committee is supposed to do its work according to the principles that are set by the board of directors. Good corporate governance ensures that the interests of the Corporation are taken care of by the management and the shareholders value in enhanced. The interests of the stakeholders should also be taken care of in good governance. The role of the audit committee is related to how the board discharges its function and they make sure there is accountability to the board. If the audit committee is effective, the board also becomes effective. The relationship between the audit committee and the board makes them have the same issues that impact the board and the audit committee. That is why the audit committee is important in corporate governance. Their main responsibility as they enhance corporate governance is to assist and help the board in fulfilling its duties in external and internal audit, financial reporting, risk management and responding to management needs as explained below.

    Financial reporting

     The audit committee helps the board in financial reporting because they have the responsibility of reviewing the financial reports. They check both the interim and the annual reports of the entity. They focus on the disclosures and the reported earnings of the company and they make sure that the financial reporting is quality. When the Audit Committee ensures that there is a good financial reporting system, they act as a cornerstone of Corporate Governance.  The existence of the audit committee helps in producing high quality management and financial reporting.  The audit committee also helps the management in the reviewing of the financial statements before they are submitted to the board that approves. They also discuss with the management and the internal auditors the finding of the financial reports in the company.

    Risk management

    This is an ongoing process which the audit committee is supposed to check as their responsibility. The risk management process is important in any organization or any entity and that is why it helps in the enhancement of the corporate governance.

     

     

    Internal audit

    The management committee ensures that the internal auditors get the information they need and they encourage the internal auditors to communicate even if the meetings are not scheduled. They also have the responsibility of reviewing the plans, findings and the reports of the internal audits and making recommendations in the internal audit.

    External Audit

    The responsibility of the audit committees in this area is to establish a relationship with the external auditors and reviewing their scope of work. [2]An important role of the Audit committee is to oversee the work of the internal auditor, the external auditors and to check at the corporation board. They bridge the gap between the corporation board and the auditors.

    Responding to risk management needs

    The audit committees assist the management of an entity in addressing the issues of the business. They also communicate with the management about the progress, status and the development of the business. The audit committees are important because they can be used to calm the economic storm together with the management of the companies. The field of vision of the audit committee is supposed to be expanded and their duties need to be clearly defined.

    The audit committee has some powers that they are supposed to exercise in the course of their duty. They are allowed to get the information they require from any employee in the company. They can also get legal professional advice from people who are outside the company. It can also within its terms of reverence investigate any information. The audit committees are allowed to recommend appointments of the auditor to the board. They can also recommend the replacements and the audit fees that are to be fixed. Among their role is also the role of approving the payments for the auditors and other services that are rendered by the auditors. This ensures that there is good corporate governance.

    Independence of the Audit Committee is one of the important qualities that make it effective and give the desired results. In the public sectors, the governing authority may assume different roles like being a board member and at the same time being the chief executive. The independence of the audit committee affect the disclosure of the of the companies financial reports.[3] Based on interviews conducted in Saudi Arabia, the Audit Committees independence was questioned because they had not established a relationship with the external and the internal auditors. The ministry of commerce was to issue further guidance and regulations for the improvement and effectiveness of the audit committee in Saudi Arabia.

    The composition of the audit committee is supposed to be made up of a minimum of three directors and most of them are supposed to be independent directors. The requirements of the Audit Committee are that at least one of them should have accounting expertise. The chairman is supposed to be among the independent directors. In every Annual General Meeting, the chairman of the Audit committee is supposed to be present to answer the questions that are asked by the shareholders of the company. The Company secretary acts as the secretary of the audit committee. The presence of the audit committees in the Annual General Meeting gives the evidence of their importance in the implementation of the corporate governance.

    Communication is also an important quality because it helps the audit committee in assisting the management in the interpretation of the technical matters that may be found in accounting. The audit committee communicate with the auditors and the finance officers in the complicated matters. An audit committee is supposed to enhance accountability in the accounting sectors by overseeing the accounting and reporting issues.  The audit committees also are supposed to oversee some internal controls. The controls include the safeguarding of assets, risk and environmental assessment and compliance with regulations and the laws. Overseeing the weaknesses in the internal control helps them to prevent fraudulent activities and the errors that may occur. That audit committees are supposed to understand the internal controls in an entity and their components which are the control activities, monitoring, information and communication, risk assessment and environment control.

    According to the Report on the Observation of the Standards and Codes in Saudi Arabia, the corporate governance principles, regulations and the rules that have been put in place reflect the international good practice. The report showed that the application of the principles of corporate governance is still in the early stages. The Report Observation Standard Codes recommended some adjustments to be done so that the corporate governance in Saudi Arabia can reach the international standard. This shows that the audit committee in Saudi Arabia has an important role to play and they must make sure that the international standard is attained. The report of the World Bank stated that the Capital Market Authority in Saudi Arabia was in the process of implementing the corporate governance which was to be in three phases. This increases the use of the Audit Committee in Saudi Arabia and their responsibilities are increased as corporate governance is established in Saudi Arabia.

    Methodology

    The methods that will be used in conducting the research are both the secondary and the primary method. The primary method will involve questionnaires and survey which involves an interview that will be done to audit committees in Saudi Arabia and the chief executives of entities. The results from the questionnaires and the interview will be used together with secondary research results. The secondary method involves the literature overview where books and journal from the library will be used in the research. The books to be used will be read and analysed and the information used in the research.

    Expected results

    The expected results from the research is to know the importance of the audit committee and the role they play in the in the implementation of corporate governance. The research is supposed to give evidence that audit committee has an important role and it is needed for good corporate governance.

    Conclusions and recommendation

    For corporate governance in any country to succeed and to produce the results that are desired, the audit committee has to be used because they are the ones who will help in its implementation. They are important in all organizations and they have proved to be the cornerstone of corporate governance implementation because of the role they play. They are supposed to be independent from the authority of the company and their role is to enhance accountability and to maintain confidence in the financial reporting environment. It is recommended that all entities and companies should use corporate governance to improve their performances. For Saudi Arabia to attain the international standards of corporate governance, it is supposed to make the use of audit committee. Rules, regulations and principles to be followed in corporate governance are supposed to be laid down for proper implementation.

     

    References

    Al- Rehaily, Awad, Audit committees as a Cornerstone of Corporate Governance; Saudi Case study. King Abdulaziz University, Saudi Arabia, 2008, Vol22, p. 179-218

    International Research Journal.  Do Board Independence and Audit Committees Motivate Disclosure on Different Corporate Governance Information Categories in the Annual Reports in Developing Countries? Academic Journal. 2010, Issue 57, p206-225, 20p

    Solomon, Jill, Corporate Governance and accountability. John Wiley and sons. Southern Gate. Book. 2007. P. 26-30.

     


    [1] J. Solomon, Corporate Governance and accountability. John Wiley and sons. Southern Gate, Book. 2007. P. 26-30.

    [2] A. Al- Rehaily, Audit committees as a Cornerstone of Corporate Governance; Saudi Case study. King Abdulaziz University, Saudi Arabia, 2008, Vol22, p. 179-218

    [3] International Research Journal.  Do Board Independence and Audit Committees Motivate Disclosure on Different Corporate Governance Information Categories in the Annual Reports in Developing Countries? Academic Journal. 2010, Issue 57, p206-225, 20p

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