1.1
After some well-publicised international accounting and auditing failures in 2001 and 2002, there has been an increasing focus on the role of audit committees in the public and private sectors. The role of audit committees has also expanded well beyond that of examining the financial reporting compliance and controls of their entities. The Sarbanes-Oxley Act 2002¹ in the United States and the strengthening of corporate governance requirements and expectations in the public and private sectors in many overseas jurisdictions highlighted the need for more audit committees, and for those audit committees to be more effective.

1.2
Overseas regulatory bodies are intervening more. They are setting clear standards and expectations for governance and assurance models in the public sector, particularly in Canada and Australia. Although New Zealand might not legislate for mandatory audit committees, Parliament expects the public sector to adopt governance principles that are consistent with good practice.

1.3
We have produced this good practice guide to help New Zealand public entities to set up audit committees and sound audit committee practices, to contribute to the improved governance and performance of public entities.

How to use this guide

1.4
This guide sets out the principles and good practices needed to set up and effectively operate an audit committee in the public sector. It also includes examples of charters and checklists, and a list of other useful resources, to help public entities operate effective audit committees.

1.5
However, this guide is not intended to be a “how to” manual, because public entities need to determine the most appropriate form of governance arrangements for their specific circumstances.

1.6
A public entity may decide not to form an audit committee. We acknowledge that, for some public entities, their size, their complexity, and the composition of their Board is such that there may not be a justification for an audit committee. These public entities need to be able to demonstrate to stakeholders that they have appropriate systems and processes in place to support the governing body (the board or council) or chief executive (of a government department) to carry out their accountability and governance responsibilities. Appendix 3 sets out the matters such systems and processes would need to address.

1.7
To prepare this guide, we reviewed a wide range of international literature about audit committees. To gain the perspectives of those working in New Zealand’s public entities, we interviewed chief executives and audit committee chairpersons from government departments, Crown entities, tertiary institutions, district health boards, local authorities, and State-owned enterprises. We also sought the views of internal auditors² from a cross-section of these public entities.

1.8
Throughout this guide we refer to the “audit committee”. This term includes committees that perform audit committee functions but that use a slightly different name (for example, finance committee, audit and risk committee, or risk and assurance committee).

1.9
We also refer to the governing body and chairperson. These terms are interchangeable with sector-specific equivalents, such as the council or board and mayor or chancellor.

1.10
This guide is not sector-specific. In our view, the principles and practices we outline apply to the public sector as a whole.

1: The Sarbanes-Oxley Act 2002, also known as the Public Company Accounting Reform and Investor Protection Act 2002, is a United States federal law enacted after several major corporate and accounting scandals including those involving Enron, Tyco International, Peregrine Systems, and WorldCom.

2: The term “internal auditor” means the individual or organisation that is responsible for providing internal assurance services to the organisation. We acknowledge that not all public entities have an internal audit function.