A. Concept and Audit Committee Definition
One of the aforementioned committees, the audit committee, has separate tasks in term of supervising and assisting the BoC in fulfilling its oversight responsibilities. For instance, the Audit Committee has the power to conduct or authorize investigation into matters within the committee's scope of responsibilities. The Institute of Internal Auditors (IIA) recommends that every public company have an audit committee organized as a standing committee . The Institute also encourages the establishment of audit committees in other organizations including not for profit and governmental bodies. The audit committee should consist solely of outside commissioners, independent of management. The primary responsibilities of the audit committee should be assisting the BoC in carrying out their responsibilities as they relate to the organization's accounting policies, internal control and financial reporting practices. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee: Working Together Toward Common Goals)
The existence of Audit Committee in the frame of Good Corporate Governance implementation can be seen from the regulations as follo :
1. Circular Letter of Bapepam Chairman No. Se-03/PM regarding Audit Committee
2. Decree of PT ursa Efek Jakarta Directors Number Kep-305/BEJ/07/-2004 regarding regulation No. I-A regarding stock listing and equity security otherthan stock issued by listed company applied since July 19, 2004.
3. Minister of SOEs Decree Number Kep-133/M-BUMN/1999 regarding formation of Audit Committee for SOEs
4. Professional Public Accountant Standard issued by Indonesian Accountant Association. Audit standard statement determined such requirements for auditor that certain problems in respect to the audit implementation is comunicated to supervisory in charge person in the financial report. The party mentioned herein as information receiver is audit committee.
In addition, Indonesian Audit Committee Association, an independent organization which has the same vision with GCG has issued an audit committee manual in which referred as a practical guideline to all audit committee members to understand its function, task and responsibility.
A. Function and Audit Committee Role
In general, audit committee exercises responsibility in three areas, namely:
a. Financial Reporting.
b. Corporate Governance.
c. Corporate Control.
1. Financial Reporting
The responsibility of the Audit Committee in the area of financial reporting is to provide assurance that financial disclosures made by management reasonably portray the company's:
a. Financial Condition.
b. Results of Operations.
c. Plans and Long Term commitments.
The specific steps involved in carrying out this responsibility include:
1. Recommending the independent accountants.
2. Overseeing the external audit coverage, including:
¨ Auditor engagement letter
¨ Estimated fees
¨ Timing of auditors' visits
¨ Coordination with internal audit
¨ Monitoring audit results
¨ Review of auditors performance.
3. Reviewing accounting policies and policy decisions.
4. Examining the financial statements, including:
¨ Interim financial statements
¨ Annual financial statements
¨ Auditor's opinion and Management Letters.
With respect to the review of accounting policies and policy decisions, a useful approach would be to require from the chief accounting officer a concise summary of all significant accounting policies underlying the financial statements. This summary should be updated as necessary and reviewed by both the independent accounting and the internal auditors.
2. Corporate Governance
The responsibility of the Audit Committee in the area of corporate governance is to provide assurance that the corporation is in reasonable compliance with pertaining laws and regulation, is conducting its affairs ethically, and is maintaining effective controls against employee conflict of interest and fraud.
The specific steps involved in carrying out this responsibility, include:
Reviewing corporate policies relating to compliance with laws and regulations, ethics, conflict of interest and the investigation of misconduct and fraud;
b. Reviewing current/pending litigation or regulatory proceedings bearing on corporate governance in which the corporation is a party;
c. Reviewing significant cases of employee conflict of interest, misconduct and fraud;
d. Requiring the internal auditor to report the scope of reviews of corporate governance and any significant finding.
3. Corporate Control
The responsibility of audit committees for corporate control includes an understanding of the company's key financial reporting, risks areas and system of internal control. The committee should monitor the control process through internal auditing, as the scope of the internal audit should encompass the examination and evaluation of the adequacy and effectiveness of the organization's system of internal control and the quality of performance in carrying out assigned responsibilities.
In addition, the new definition of internal auditing states that internal auditing is an independent objective assurance and consulting activity designed to add value and improve an organization's operations and it helps an organization accomplish its objectives by bringing a systematic, discipline approach to evaluate and improve the effectiveness of risk management, control and governance processes. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee)
B. Membership
Moreover, further criteria and remarks concerning the audit committee are:
1. at least one audit committee member should have sound financial and accounting knowledge
2. chair of the audit committee should be present at Annual General Meeting to answer shareholder queries
3. the audit committee should invite such executives as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the committee but on occasions it may also meet without the presence of any executives of the company. Finance director and head of internal audit and, when required, a representative of the external auditor should be present as invitees for the meetings of the audit committee
4. the Company Secretary should act as the secretary to the committee
5. powers of the audit committee should include the following:
i. to investigate any activity within its terms of reference
ii. to seek information from any employee
iii. to obtain outside legal or other professional advice
iv. to secure attendance of outsiders with relevant experience, if it considers necessary
(Pratip Kar, 2000)
C. The Audit Committee Charter
The tone of a company's control environment is set at the top, by the board of commissioners in general and the audit committee in particular. The rest of the board often relies on the audit committee to notice and question any unusual business practice, aggressive accounting methods or violations of the company's code of business conduct. But at many companies audit committee members may not have the expertise in matters of internal control, and some people serving on audit committees have very little accounting or financial background at all. Accordingly, audit committee members need a reference guide to their responsibilities. That is the function of an audit committee charter.
A comprehensive charter enhances the effectiveness of the audit committee, serving as a road map for committee members. A well-thought-out charter also should describe the committee's composition and specify access to appropriate resources, for instance, the charter should authorize the audit committee:
a. Funding to retain outside legal counsel without approval from management;
b. Funding to retain an independent accounting firm if a second opinion is called for;
c. Ready access to all books, records and employees of the corporation;
d. Power to conduct any investigation appropriate to fulfilling its responsibility.
In addition, while auditors may find it difficult to detect fraud when management misrepresents the facts, they should take the control environment into account when planning audits - which means auditors should be looking at their clients' audit committee charter in order to set up the financial reporting that will be provided to the shareholders. (James W. Bean, 1999)
The responsibilities of the audit committee should be stated in a formal, written charter or equivalent document that is approved by the full board or governing body of the entity or institution. The charter should articulate the authority, responsibility and structure of the audit committee. The responsibilities, at a minimum, should address financial and other reporting practices, internal control and compliance with laws, regulations and ethics. The charter should also state that the audit committee will meet periodically and may call additional or special meetings as needed, if possible, the authority, responsibilities and structure of the audit committee should be provided in the governing law of the affected entity.
The audit committee charter should also clearly state that:
¨ The primary responsibility for financial and other reporting, internal controls and compliance with laws, regulations and ethics within the entity rests with executive management;
¨ The governing board or chief executive has oversight responsibilities in these areas, and the audit committee assists the governing board or chief executive in fulfilling these responsibilities. The audit committee must have unrestricted access to all information, including documents and personnel, and have adequate resource in order to fulfill its oversight responsibilities;
¨ It is important to have an impartial and objective assessment of the entity's management;
¨ The chief executive and the governing body must support and endorse an audit committee which operates independently of management and is free of organizational impairments;
¨ The audit committee and the internal auditors should maintain a degree of professional independence when assessing management's performance of its responsibilities. However, this does not mean that an adversarial role is necessary or desirable because the internal auditors and management should have common goals;
¨ To ensure the independence of the internal auditing function and that appropriate action is taken on audit findings, the Audit Committee should promote and enhance the mutual cooperation among the committee, internal auditors and executive management.
(The Institute of Internal Auditors, The Audit Committee in the Public Sector)
D. Audit Committee Structure
The Audit Committee should be made up of individuals who are independent of the day to day management of the entity and who have the necessary program and/or management expertise to perform their review function effectively. One of the primary reasons for this independence is to ensure an unbiased perspective on reports and recommendations brought to the committee. Independent individuals would be more apt to be impartial and objective in such matter.
The number of members on the Audit Committee should be determined by the size of the organization. Three to five members, however, is usually ideal. The audit committee will normally find it necessary to meet three to four times annually in order to fulfill its financial reporting responsibilities. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee)
E. Conclusion
Good governance promotes relationship of accountability among the primary corporate organs (the BoC, the BoD, and the Shareholders) to enhance corporate performance. It holds management accountable to the BoC and the BoC accountable to shareholders. In this paradigm, the BoC is in place to ensure that management is working in the best interests of the corporation and its shareholders - by working to enhance corporate economic value. Furthermore, the BoC plays a critical role in directing corporate strategy and ensuring that managers are promoting corporate performance in furtherance of the corporate objectives. Essential to this role is independence of the commissioners meaning that the BoC:
· has the ability to discuss issues outside the presence of management
· is provided with sufficient information to take its decisions, and
· actively participates in agenda-setting and strategy.
This requires individuals with impeccable personal qualities, diverse backgrounds, core competencies and serious understanding of the company and the business.
Furthermore, the BoC in carrying out oversight function should work with the management in a non-confrontational way to achieve corporate legal and ethical compliance. This oversight function is typically delegated by the full board of Commissioners to the audit committee, which such oversight includes ensuring that quality accounting policies, internal controls, and independent and objective outside auditors are in place to deter fraud. Briefly, this oversight function is addressed to anticipate financial risks and to promote accurate, high quality and timely disclosure of financial and other material information to the board, to the public markets, and to shareholders.
In sum, an active, sophisticated, skilled, diverse and -importantly- independent BoC that follows effective board processes is best positioned to ensure that the corporation's assets are being put to their most productive use.
One of the aforementioned committees, the audit committee, has separate tasks in term of supervising and assisting the BoC in fulfilling its oversight responsibilities. For instance, the Audit Committee has the power to conduct or authorize investigation into matters within the committee's scope of responsibilities. The Institute of Internal Auditors (IIA) recommends that every public company have an audit committee organized as a standing committee . The Institute also encourages the establishment of audit committees in other organizations including not for profit and governmental bodies. The audit committee should consist solely of outside commissioners, independent of management. The primary responsibilities of the audit committee should be assisting the BoC in carrying out their responsibilities as they relate to the organization's accounting policies, internal control and financial reporting practices. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee: Working Together Toward Common Goals)
The existence of Audit Committee in the frame of Good Corporate Governance implementation can be seen from the regulations as follo :
1. Circular Letter of Bapepam Chairman No. Se-03/PM regarding Audit Committee
2. Decree of PT ursa Efek Jakarta Directors Number Kep-305/BEJ/07/-2004 regarding regulation No. I-A regarding stock listing and equity security otherthan stock issued by listed company applied since July 19, 2004.
3. Minister of SOEs Decree Number Kep-133/M-BUMN/1999 regarding formation of Audit Committee for SOEs
4. Professional Public Accountant Standard issued by Indonesian Accountant Association. Audit standard statement determined such requirements for auditor that certain problems in respect to the audit implementation is comunicated to supervisory in charge person in the financial report. The party mentioned herein as information receiver is audit committee.
In addition, Indonesian Audit Committee Association, an independent organization which has the same vision with GCG has issued an audit committee manual in which referred as a practical guideline to all audit committee members to understand its function, task and responsibility.
A. Function and Audit Committee Role
In general, audit committee exercises responsibility in three areas, namely:
a. Financial Reporting.
b. Corporate Governance.
c. Corporate Control.
1. Financial Reporting
The responsibility of the Audit Committee in the area of financial reporting is to provide assurance that financial disclosures made by management reasonably portray the company's:
a. Financial Condition.
b. Results of Operations.
c. Plans and Long Term commitments.
The specific steps involved in carrying out this responsibility include:
1. Recommending the independent accountants.
2. Overseeing the external audit coverage, including:
¨ Auditor engagement letter
¨ Estimated fees
¨ Timing of auditors' visits
¨ Coordination with internal audit
¨ Monitoring audit results
¨ Review of auditors performance.
3. Reviewing accounting policies and policy decisions.
4. Examining the financial statements, including:
¨ Interim financial statements
¨ Annual financial statements
¨ Auditor's opinion and Management Letters.
With respect to the review of accounting policies and policy decisions, a useful approach would be to require from the chief accounting officer a concise summary of all significant accounting policies underlying the financial statements. This summary should be updated as necessary and reviewed by both the independent accounting and the internal auditors.
2. Corporate Governance
The responsibility of the Audit Committee in the area of corporate governance is to provide assurance that the corporation is in reasonable compliance with pertaining laws and regulation, is conducting its affairs ethically, and is maintaining effective controls against employee conflict of interest and fraud.
The specific steps involved in carrying out this responsibility, include:
Reviewing corporate policies relating to compliance with laws and regulations, ethics, conflict of interest and the investigation of misconduct and fraud;
b. Reviewing current/pending litigation or regulatory proceedings bearing on corporate governance in which the corporation is a party;
c. Reviewing significant cases of employee conflict of interest, misconduct and fraud;
d. Requiring the internal auditor to report the scope of reviews of corporate governance and any significant finding.
3. Corporate Control
The responsibility of audit committees for corporate control includes an understanding of the company's key financial reporting, risks areas and system of internal control. The committee should monitor the control process through internal auditing, as the scope of the internal audit should encompass the examination and evaluation of the adequacy and effectiveness of the organization's system of internal control and the quality of performance in carrying out assigned responsibilities.
In addition, the new definition of internal auditing states that internal auditing is an independent objective assurance and consulting activity designed to add value and improve an organization's operations and it helps an organization accomplish its objectives by bringing a systematic, discipline approach to evaluate and improve the effectiveness of risk management, control and governance processes. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee)
B. Membership
Moreover, further criteria and remarks concerning the audit committee are:
1. at least one audit committee member should have sound financial and accounting knowledge
2. chair of the audit committee should be present at Annual General Meeting to answer shareholder queries
3. the audit committee should invite such executives as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the committee but on occasions it may also meet without the presence of any executives of the company. Finance director and head of internal audit and, when required, a representative of the external auditor should be present as invitees for the meetings of the audit committee
4. the Company Secretary should act as the secretary to the committee
5. powers of the audit committee should include the following:
i. to investigate any activity within its terms of reference
ii. to seek information from any employee
iii. to obtain outside legal or other professional advice
iv. to secure attendance of outsiders with relevant experience, if it considers necessary
(Pratip Kar, 2000)
C. The Audit Committee Charter
The tone of a company's control environment is set at the top, by the board of commissioners in general and the audit committee in particular. The rest of the board often relies on the audit committee to notice and question any unusual business practice, aggressive accounting methods or violations of the company's code of business conduct. But at many companies audit committee members may not have the expertise in matters of internal control, and some people serving on audit committees have very little accounting or financial background at all. Accordingly, audit committee members need a reference guide to their responsibilities. That is the function of an audit committee charter.
A comprehensive charter enhances the effectiveness of the audit committee, serving as a road map for committee members. A well-thought-out charter also should describe the committee's composition and specify access to appropriate resources, for instance, the charter should authorize the audit committee:
a. Funding to retain outside legal counsel without approval from management;
b. Funding to retain an independent accounting firm if a second opinion is called for;
c. Ready access to all books, records and employees of the corporation;
d. Power to conduct any investigation appropriate to fulfilling its responsibility.
In addition, while auditors may find it difficult to detect fraud when management misrepresents the facts, they should take the control environment into account when planning audits - which means auditors should be looking at their clients' audit committee charter in order to set up the financial reporting that will be provided to the shareholders. (James W. Bean, 1999)
The responsibilities of the audit committee should be stated in a formal, written charter or equivalent document that is approved by the full board or governing body of the entity or institution. The charter should articulate the authority, responsibility and structure of the audit committee. The responsibilities, at a minimum, should address financial and other reporting practices, internal control and compliance with laws, regulations and ethics. The charter should also state that the audit committee will meet periodically and may call additional or special meetings as needed, if possible, the authority, responsibilities and structure of the audit committee should be provided in the governing law of the affected entity.
The audit committee charter should also clearly state that:
¨ The primary responsibility for financial and other reporting, internal controls and compliance with laws, regulations and ethics within the entity rests with executive management;
¨ The governing board or chief executive has oversight responsibilities in these areas, and the audit committee assists the governing board or chief executive in fulfilling these responsibilities. The audit committee must have unrestricted access to all information, including documents and personnel, and have adequate resource in order to fulfill its oversight responsibilities;
¨ It is important to have an impartial and objective assessment of the entity's management;
¨ The chief executive and the governing body must support and endorse an audit committee which operates independently of management and is free of organizational impairments;
¨ The audit committee and the internal auditors should maintain a degree of professional independence when assessing management's performance of its responsibilities. However, this does not mean that an adversarial role is necessary or desirable because the internal auditors and management should have common goals;
¨ To ensure the independence of the internal auditing function and that appropriate action is taken on audit findings, the Audit Committee should promote and enhance the mutual cooperation among the committee, internal auditors and executive management.
(The Institute of Internal Auditors, The Audit Committee in the Public Sector)
D. Audit Committee Structure
The Audit Committee should be made up of individuals who are independent of the day to day management of the entity and who have the necessary program and/or management expertise to perform their review function effectively. One of the primary reasons for this independence is to ensure an unbiased perspective on reports and recommendations brought to the committee. Independent individuals would be more apt to be impartial and objective in such matter.
The number of members on the Audit Committee should be determined by the size of the organization. Three to five members, however, is usually ideal. The audit committee will normally find it necessary to meet three to four times annually in order to fulfill its financial reporting responsibilities. (The Institute of Internal Auditors, Internal Auditing and The Audit Committee)
E. Conclusion
Good governance promotes relationship of accountability among the primary corporate organs (the BoC, the BoD, and the Shareholders) to enhance corporate performance. It holds management accountable to the BoC and the BoC accountable to shareholders. In this paradigm, the BoC is in place to ensure that management is working in the best interests of the corporation and its shareholders - by working to enhance corporate economic value. Furthermore, the BoC plays a critical role in directing corporate strategy and ensuring that managers are promoting corporate performance in furtherance of the corporate objectives. Essential to this role is independence of the commissioners meaning that the BoC:
· has the ability to discuss issues outside the presence of management
· is provided with sufficient information to take its decisions, and
· actively participates in agenda-setting and strategy.
This requires individuals with impeccable personal qualities, diverse backgrounds, core competencies and serious understanding of the company and the business.
Furthermore, the BoC in carrying out oversight function should work with the management in a non-confrontational way to achieve corporate legal and ethical compliance. This oversight function is typically delegated by the full board of Commissioners to the audit committee, which such oversight includes ensuring that quality accounting policies, internal controls, and independent and objective outside auditors are in place to deter fraud. Briefly, this oversight function is addressed to anticipate financial risks and to promote accurate, high quality and timely disclosure of financial and other material information to the board, to the public markets, and to shareholders.
In sum, an active, sophisticated, skilled, diverse and -importantly- independent BoC that follows effective board processes is best positioned to ensure that the corporation's assets are being put to their most productive use.
