A board cannot, in the time available to it, do all the work the codes require without specialisation. The committee structure is the institutional answer. And of the four standard committees — audit, remuneration, nomination, risk — the audit committee is the most consequential.
What the audit committee oversees
The audit committee's territory is broad: the integrity of the financial statements, the relationship with the external auditor, the internal audit function, the risk-management framework (in boards without a separate risk committee), the compliance framework, and the controls environment. The committee's work is the institutional defence of the company's financial reporting and, by extension, the credibility of the company's communications with the capital markets.
Why the chair matters so much
The audit committee chair has an outsize role. The chair is:
A serious audit committee chair commands a significant portion of the company's institutional weight. The standing within the board and outside it is, in mature governance regimes, second only to the chair of the board.
The private session
The committee must meet the external auditor without management present at least annually. The question that matters: "Is there anything you would like to tell us that you have not been able to raise with management present?" This single question justifies the existence of the audit committee.
The common failure
An audit committee that follows its terms of reference mechanically — reviewing the statements, noting the auditor's report, ticking the compliance boxes — can miss the problems the committee exists to catch. The form of the audit committee was correct at Wirecard. The substance was absent.
The discipline is to go beyond the checklist: probe the management judgements, challenge the accounting policies, understand where the auditor was uncomfortable, and follow up on internal audit findings that management has been slow to address.
This article is adapted from The Director's Craft by Peter Burchardt. Read the full chapter in the book →
