Role of Finance Professionals in Audit Committee

Presented By:
Name: ………………………..
Registration No. ……………………
On behalf of
The Institute of Cost and Management
Accountants of Bangladesh [ICMAB]
 This presentation will focus on:

 Audit Committee (AC): Composition, Role and

Reporting
 Finance Professionals: who and what they do
 Why financial literacy is critical to perform a
better role in the AC
 Some Literature-based evidence
 Policy Recommendations
 Concluding remarks
 Audit Committee (AC): Composition

• A crucial element of governance structure,

• Comprises 3 to 5 members of which at least
one member must be from independent or
outside directors
• AC member should be financially literate and
at least one member shall have accounting or
financial management background
• In most countries, independent director
should be the chairperson of the AC
 Audit Committee (AC): Role
• Oversee the financial reporting process,
• Monitor choice of accounting policies
• Monitor adequacy of internal audit and compliance
process
• Oversee hiring and performance of external auditors
• Review the financial statements and management
discussion and analysis before presenting to the board
for approval
• Oversee whether the proceeds raised from IPO utilized
for the purposes stated in the prospectus approved by
the Commission (SEC)
Audit Committee (AC): Reporting

AC shall report on:

Board of Directors 1. Conflicts of interest
2. Suspected fraud or material
defect in the internal audit
and compliance process
Report to: Shareholders 3. Suspected fraud in the
financial statements
4. Suspected infringement of
Commission laws and regulatory
compliances
 Finance Professionals are expected to have:

• Concrete knowledge of business and economic

activities
• Solid foundation of financial reporting process
• Reasonable understanding of internal audit,
internal control and regulatory compliances
• The ability to apply judgement in detecting at
least significant/material errors and frauds in
the financial statements
Why Financial Literacy is critical in AC?

• Without having adequate knowledge in

accounting and finance, members of an AC shall
be:
o Incapable to detect material frauds in the financial
statements
o Incapable to detect material defect in the internal
audit and compliances
o Unable to report infringement of relevant laws and
regulations associated with the financial reporting
process
o Conflict of interests between the principals and agents
 Empirical Evidence: Role of finance people in AC

Prior research revealed that the presence of financially

literate people in the AC allows:
– To improve confidence in the financial reports
disclosures
– To reduce earnings management activities
– To improve the quality of internal control activities
– To improve the quality of external audit process
References:
• Krishnamoorthy, G., Wright, A., & Cohen, J. (2002). Audit committee effectiveness and financial reporting quality:
Implications for auditor independence. Australian Accounting Review, 12(28), 3-13.
• Coates, D. J., Marais, M. L., & Weil, R. L. (2007). Audit committee financial literacy: A work in progress. Journal of
Accounting, Auditing & Finance, 22(2), 175-194.
• Salleh, N. M. Z. N., & Haat, M. (2014). Audit committee and earnings management: Pre and post MCCG.
International review of management and business research, 3(1), 307-318.
 Policy Recommendations
• AC members should be financially literate
• One of the members should have sound
knowledge on accounting and finance
activities
• Inclusion of professional accountants might be
a better representation of financially literate
people
 Concluding Remarks

• The presence of finance professionals

preferably professional accountants in the
audit committee can lead to an improvement
in the financial reports, internal audit and
compliance, and external audit effectiveness
Thank You for listening