Since Boards of Directors are charged with the governance of their organisations, one of the key areas of focus for many Directors will be whether the Board itself and its sub-committees are operating effectively. It is one thing for Boards to meet regularly, but there are key questions that need to be asked as to whether they are discharging their duties effectively and efficiently, and whether there are areas for improvement.
The UK Corporate Governance Code sets out the standards of good practice in relation to board leadership effectiveness, and accountability. Among the provision within the code is the requirement for entities to carry out an annual review of the effectiveness of their Board and Committees.
Given that Audit Committees play a crucial role in the oversight and scrutiny of the system of internal control, risk management and governance of any organisation, this review of effectiveness is particularly relevant to them. Indeed, there is significant pressure on Audit Committees to be aware of the best practice and to perform their duties effectively.
There are several areas to be considered and questions to be answered as part of the review of effectiveness, and all Boards and Committees need to move away from the “this is how we have always done it” mentality, and transition to having a focus on improvement.
The assessment of effectiveness should have input from the Board and Committee members, as well as management. For Audit Committees in particular, some specific areas of consideration will include; size of the Audit Committee; relevance, member make-up and skill base; communication, reporting, papers and timing; ability of members and training; frequency and duration; clarity of role and remit, clear terms of reference; and expectations of the Audit Committee.
The evaluation of effectiveness can be carried out internally, or externally by an independent professional service provider. Both options are appropriate, and which option depends on the level of assurance that is required, or the importance of the independent assessment and opinion.
Within a Board environment there can be differences of opinion, and one person’s view of an effective Audit Committee may differ from the next. In such cases, an external independent review can be more beneficial. Other factors, such as cost effectiveness and the level of management time input, should be considered before deciding on whether the review should be internal or external.
Many Audit Committees at companies or organisations across Northern Ireland would undoubtedly declare themselves effective, by the fact that they have discharged their duties. However, if they have not actually objectively assessed this effectiveness, and a formal review incorporating the above points has not been carried out, then perhaps the Audit Committee, may not be as effective as they think...