Key Takeaways

An audit committee is made up of independent board members.
The committee’s role is to oversee financial reporting and auditing.
Regulatory bodies can dictate who can sit on a committee.
Audit committees must sign off on quarterly and annual reports

Setting up an audit committee ensures that a company has checks and balances in place for monitoring financial reporting and the general financial well-being of the company.

What is an Audit Committee?

One of the responsibilities of a company’s board of directors is to form an audit committee. This operating committee is tasked with overseeing the company’s financial reporting and auditing processes. The committee works closely with both internal and independent auditors to ensure that the company’s financial disclosure is correct and of a high enough quality (See Corporate Finance Institute). It also assesses the adequacy of the company’s internal controls and the efficacy of the risk management plan.

In many countries, an audit committee is mandatory for every publicly traded company. A stock exchange or an oversight body may mandate the composition, roles, and responsibilities of these committees. In the US, the Securities and Exchange Commission (SEC) has issued a rule on the Standards Relating to Listed Company Audit Committees (See U.S. Securities and Exchange Commission). Committees must have at least three members and should be composed of independent directors (not staff or officers of the company). At least one should be a financial expert, preferably a certified public accountant (CPA). The SEC states that committee members cannot be paid for their roles on the committee but only compensated for being directors. Committee members must also be unaffiliated with the company, meaning they have no control over or ownership of the company.

While unlisted and smaller companies don’t necessarily need a CPA or equivalent, a properly constituted audit committee is still good practice.

Responsibilities of the Audit Committee

Audit committees play a crucial role in monitoring the operations of corporations. The responsibilities of an audit committee include:

Oversight of financial reporting: The audit committee must oversee the company’s accounting and financial reporting processes, including internal auditing, disclosure controls, and external audits of consolidated financial statements. This includes helping to define critical accounting policies, reviewing quarterly and annual financial statements, creating proxy reports, and assessing the adequacy and effectiveness of internal controls.

Risk management: The committee is responsible for identifying risks related to financial reporting, strategies, taxes, accounting, disclosure, and credit and liquidity. It also considers exposures related to data privacy, competition, regulatory compliance, operations, and business continuity. It assesses these risks and makes recommendations for their mitigation or minimization, then audits these mitigation efforts regularly.

Engagement of a public accounting firm: Another main responsibility of the committee is to engage and pay an independent public accounting firm to audit the company. This accounting firm will report to the auditing committee overseeing its work while ensuring its independence and lack of any conflict of interest.

Receipt and management of complaints: An audit committee should be able to put into place procedures for collecting and reacting to complaints or observations relating to accounting, controls, and auditing procedures. It should specifically implement procedures for reports or “whistleblowing” by the company’s employees. The committee should consider these submissions while also protecting the submitter’s confidentiality

Engagement of advisors: The committee doesn’t have to perform all of these functions by itself. An audit committee should have the power to engage legal counsel and other advisors as needed and should have access to a budget to do so.

Function / Area	Primary Responsibilities	Why It Matters
Financial Reporting Oversight	Review quarterly & annual financial statements; assess accounting policies and judgments.	Ensures accuracy and reliability of financial disclosures to investors and stakeholders.
Internal Controls & Risk Management	Monitor internal audit function; assess internal control systems; evaluate business risk exposures.	Reduces risk of fraud, misstatements, and compliance breaches — supports long-term stability.
External Auditor Oversight	Select, compensate, and oversee independent external auditors; pre-approve audit and non-audit services.	Maintains auditor independence and objectivity; prevents conflicts of interest and ensures audit quality.
Compliance & Regulatory Reporting	Ensure compliance with laws, regulations, and listing standards; manage disclosures and whistleblower mechanisms.	Helps avoid legal/regulatory penalties and preserves corporate reputation and investor trust.
Whistleblower & Ethics Oversight	Establish procedures for complaints or irregularities; oversee investigations and confidentiality protections.	Provides internal checks and accountability — critical for governance and ethical conduct.

Challenges Faced by Audit Committees

Audit committees face a difficult assignment. They’re responsible for ensuring healthy, transparent, and compliant financial reporting and disclosure. They also need to oversee the assessment and management of financial risks. In this capacity, they face many challenges, including:

Managing conflicts of interest: Committee members have to avoid having any conflicts of interest which may interfere with their roles. This generally means they have to ensure their own independence and lack of association with the company. They must also ensure that the outside auditors they engage are truly independent and also not associated with the company. They must have no financial links other than being hired to provide auditing services.

Regulatory compliance: Audit committees are regulated by stock exchanges and oversight bodies. Members must comply with the rules set out by the bodies that lay out conditions for their committee membership (independence, financial expertise, etc.). More importantly, they need to ensure that their accounting and reporting practices conform to those laid out by regulating bodies. When rules change, they must also be aware, react to them, and recommend operational changes to ensure constant compliance. When operating internationally, this will be an exercise in global compliance.

Tone at the top: The committee also oversees ethics and compliance. As part of this oversight, it helps to set an example of ethical behavior and resist the potential for management to override controls.

Best Practices for Effective Audit Committees

Effective audit committees should be composed of independent directors with adequate financial expertise. Members should demonstrate high levels of integrity and organizational skills. They should also be professionally skeptical and willing to put time and effort into deeply investigating risks and operations. They should also foster cultures of compliance both by leading by example and enforcing disciplinary actions for violations.

Establishing Audit Committees

Audit committees are usually mandatory for publicly traded companies, depending on the jurisdiction. For unlisted companies they are usually not mandatory, but can still constitute part of good corporate governance. They monitor and assess risks while ensuring the accuracy of companies’ accounting and financial statements. Their due diligence and expertise help companies avoid accounting issues and build trust with investors.

For advice on committee set up and other corporate governance issues, get in touch with MSA’s company establishment experts.

Audit committees oversee financial reporting, internal controls, and risk management, making committee structure and expertise critical for corporate governance and stakeholder confidence. MSA Asia’s statutory audit in China expertise includes audit committee guidance. Reach out to our experts on governance.