Audit committee: 

The audit committee is a committee of the board of directors responsible for oversight of the
financial reporting process, selection of the independent auditor, and receipt of audit results both
internal and external. The committee assists the board of directors fulfill its corporate governance
and overseeing responsibilities in relation to an entity’s financial reporting, internal control
system, risk management system and internal and external audit functions. Its role is to provide
advice and recommendations to the board within the scope of its terms of reference / charter.
Terms of reference and requirements for an audit committee vary by country, but may be
influenced by economic and political unions capable of passing legislation. The European Union
directives are applied across Europe through legislation at the country level. Although specific
legal requirements may vary by country in Europe, the source of legislation on corporate
governance issues is often found at the European Union level and within the non-mandatory
corporate governance codes that cross national boundaries.

Members of audit committee:

The Audit Committee shall be comprised of three or more directors as determined by the Board,
each of whom shall meet the independence and other requirements set forth in (i) the rules of
The NASDAQ Stock Market (the “Nasdaq Rules”), and (ii) the rules of the Securities and
Exchange Commission (“SEC”), one of whom shall be designated by the Board as Chairperson.
All members of the Audit Committee shall have a basic understanding of finance and accounting
and be able to read and understand fundamental financial statements at the time of appointment
as required by the Nasdaq Rules. Additionally, at least one member shall have past employment
experience in finance or accounting, requisite professional certification in accounting, or other
comparable experience or background as required by the Nasdaq Rules and the rules and
regulations promulgated by the SEC under the Securities Exchange Act of 1934, as amended (the
“Act”).

Functions:

1. Role in oversight of financial reporting and accounting

Audit committees typically review financial statements quarterly and annually in public
companies. In addition, members will often discuss complex accounting estimates and judgments
made by management and the implementation of new accounting principles or regulations. Audit
committees interact regularly with senior financial management such as
the CFO and Controller and are in a position to comment on the capabilities of these managers.
Should significant problems with accounting practices or personnel be identified or alleged, a
special investigation may be directed by the audit committee, using outside consulting resources
as deemed necessary.
External auditors are also required to report to the committee on a variety of matters, such as
their views on management's selection of accounting principles, accounting adjustments arising
from their audits, any disagreement or difficulties encountered in working with management, and
any identified fraud or illegal acts.[8]
2. Role in oversight of the external auditor
Audit committees typically approve selection of the external auditor. The external auditor (also
called a public accounting firm) reviews the entity's financial statements quarterly and issues an
opinion on the accuracy of the entity's annual financial statements. Changing an external auditor
typically also requires audit committee approval. Audit committees also help ensure the external
auditor is independent, meaning no conflicts of interest exist that might interfere with the
auditor's ability to issue its opinion on the financial statements.

 European Union: Directive[2] 2006/43/EC, article 41.3 and 41.4: "In a public-interest entity,

the proposal of the administrative or supervisory body for the appointment of a statutory
auditor or audit firm shall be based on a recommendation made by the audit committee. The
statutory auditor or audit firm shall report to the audit committee on key matters arising
from the statutory audit, and in particular on material weaknesses in internal control in
relation to the financial reporting process."
3. Role in oversight of regulatory compliance
Audit committees discuss litigation or regulatory compliance risks with management, generally
via briefings or reports from the General Counsel, the top lawyer in the entity. Larger
corporations may also have a Chief Compliance Officer or Ethics Officer that report incidents or
risks related to the entity's code of conduct.
4. Role in monitoring the effectiveness of the internal control process and of the
internal audit
Internal control includes the policies and practices used to control the operations, accounting,
and regulatory compliance of the entity. Management and both the internal auditingfunction and
external auditors provide reporting to the audit committee regarding the effectiveness and
efficiency of internal control.

 IIA Practice Advisory: Cf. PA1110-1 paragraphs 2 and 3 (where the “board” means “an
organization's governing body, such as a board of directors, supervisory board, (...) any other
designated body of the organization, including the audit committee to whom the chief audit
executive may functionally report)
 European best practice for the role of the Audit Committee in overseeing internal audit: cf.[9]
5. Role in oversight of risk management
Organizations have a variety of functions that perform activities to understand and address risks
that threaten the achievement of the organization's objectives. The policies and practices used by
the entity to identify, prioritize, and respond to the risks (or opportunities) are typically discussed
with the audit committee. Having such a discussion is required for listing on the New York Stock
Exchange. Many organizations are developing their practices towards a goal of a risk-based
management approach called Enterprise risk management. Audit committee involvement in non-
financial risk topics varies significantly by entity. Dr. Ram Charan has argued for risk
management early warning systems at the corporate board level.[10]

The main role and responsibilities of the audit committee should include:

 monitoring the integrity of the financial statements and any formal announcements
relating to financial performance;
 reviewing internal financial controls and, unless there is a separate board risk committee,
reviewing the company’s internal control and risk management systems;
 monitoring and reviewing the effectiveness of the internal audit function;
 making recommendations to the board in relation to the appointment, re-appointment and
removal of the external auditor and approve the remuneration and terms of engagement
of the auditor;
 reviewing the auditor’s independence and objectivity;
 developing and implementing the non-audit services policy.

Market mechanisms (MMs):

Market mechanisms (MGMs) are formal or informal rules that have been consciously designed to
change the behaviour of various economic actors - including individuals, businesses, organisations
and governments - to encourage sustainable development.

Well known MMs include fair trade certification, the European Union Emission Trading
System and Payment for Ecosystem Services (PES).

MMs, meanwhile, are not to be confused with market-based instruments, for MMs, as a group,
includes command and control regulations as well as regulatory economics. As such, MM is a
broader classification.