3.1
There are four main principles that support the effective operation of an audit committee:

• independence - most of the members of an audit committee need to be independent of the management team to provide objective and impartial advice;
• competence - audit committee members need to have relevant experience and expertise to bring valuable insights and perspectives to the areas of audit committee interest;
• clarity of purpose - an audit committee needs to be clear about its mandate, purpose, and role in the organisation and within the governance structure as a whole; and
• open and effective relationships - the audit committee needs to encourage open and transparent communication and effective ways of working with stakeholders.

Independence

3.2
The effective functioning of an audit committee depends on the independence and competence of the audit committee’s members. The more independent and competent an audit committee is, the better it is able to add value to the governance of the public entity.

3.3
To achieve these benefits, most of the audit committee members for government departments should be external appointments.

3.4
We acknowledge that many government departments include internal managers as audit committee members. This can provide the independent members with further insight into the workings of the department. However, the potential disadvantages are:

• reduced objectivity in the audit committee as a whole;
• the member feeling unable to comment freely on areas managed by their colleagues; and
• other members of management who are not on the audit committee feeling disenfranchised.

3.5
Each government department should consider the merits or otherwise of inviting managers to attend the audit committee meetings rather than having management representation on the audit committee.

3.6
Separating the role of the chairperson of the audit committee from the chairperson of the governing body or chief executive underpins the independence of the audit committee. It promotes free and frank debate during audit committee meetings.

3.7
An independent chairperson (that is, someone other than the chairperson of the governing body or the chief executive) can perform their role unencumbered by any management responsibilities and perspectives, and the governing body or chief executive can receive independent advice and assurance.

3.8
Although the audit committee’s role in a government department is that of adviser to the chief executive, our interviews identified that the government departments that perceived their audit committees to be more effective usually had an audit committee with an independent chairperson.

3.9
In some public entities, the chairperson of the governing body or chief executive of the government department is a member of the audit committee. In others, they attend by invitation. The main consideration for the organisation when determining the membership of the audit committee is to not impair the audit committee’s ability to provide free and frank advice. We have no firm view on whether the chairperson of the governing body should be a member of the audit committee. However, in our view, the chief executive of a government department should not be a member, in either a full or “ex officio” capacity.

3.10
It is normal practice for senior members of staff, including the chief executive, to attend audit committee meetings. In our view, the audit committee should have the opportunity to have “committee-only” time when senior staff members are not present, depending on the nature of the issues being discussed (see paragraph 3.25).

3.11
In addition to attending the audit committee, the chief executive is likely to benefit from a regular briefing by the chairperson of the audit committee.

Competence

3.12
Collectively, people appointed to serve on audit committees need to have:

• financial expertise;
• knowledge of governance, assurance, and risk management best practice;
• a good knowledge of the sector or industry in which the public entity operates; and
• other attributes as deemed appropriate (for example, legal or information technology experience).

3.13
They should also:

• be independently minded;
• have business acumen; and
• be prepared to have candid discussions at all levels within the organisation regarding the activities and areas of responsibility of the audit committee.

3.14
The chairperson is the most important appointee. The chairperson needs to have expertise and experience in governance and to bring personal qualities and independence to the role that will openly and effectively involve all those the audit committee needs to work with.

3.15
The governing body or departmental chief executive should carefully consider the skills required for the audit committee when setting up the committee and appointing or reappointing members to the committee (see paragraphs 4.8-4.10).

3.16
Because of the appointment or election process, the members of a public entity’s governing body may not have all the skills necessary for the audit committee to function effectively. If necessary, additional skills should be obtained by appointing an independent member (or members) to the audit committee.

Clarity of purpose

3.17
An audit committee should not displace or change the accountability arrangements within a public entity. The audit committee’s constitution should enhance the existing governance framework, risk management practices, and control environment. The audit committee should provide an independent and expert view of elements of governance in an organisation.

3.18
The audit committee should also ensure that it retains a focus on governance issues and does not stray into making management decisions.

3.19
The scope of the audit committee’s role and responsibilities should be determined within the context of the public entity’s overall governance and accountability arrangements (see paragraph 4.7).

3.20
The governing body or departmental chief executive should determine the role of the audit committee. In determining the role of the audit committee, a public entity should consider:

• the organisation’s mission and objectives;
• the existence and respective roles and responsibilities of other committees within the organisation;
• the size, complexity, and maturity of the organisation; and
• whether the audit committee should have an assurance focus or more of an advisory focus.

3.21
Many organisations have separately constituted risk or finance committees. In these public entities, the roles, responsibilities, and accountabilities of all governance arrangements should be clearly set out so that there is no duplication or gap in governance.

3.22
As discussed in more detail in Part 4, regardless of other committees, the activities of the audit committee should be linked to risk management disciplines. The audit committee should oversee the main risks facing an organisation and the effectiveness of the risk management practices in place. If audit committees are isolated from the public entity’s risk management framework:

• the audit committee will not focus on the key performance issues or risks faced by the public entity;
• auditing and assurance services may not be effective; and
• valuable opportunities for improved performance may be lost.

3.23
If members of the audit committee are also members of the governing body, they already have access to risk and strategy information as part of their wider role as board members or councillors. Accordingly, there should be a reduced risk of audit committee activities not aligning with the risk management framework.

3.24
The risk of misalignment increases for audit committees within government departments if independent members do not have a broad understanding of the department’s strategic and operational risk management framework. Therefore, it is important that these members have appropriately regular briefings on these matters.

Open and effective relationships

3.25
To be effective, an audit committee needs to operate in an environment of co-operation and trust. This is usually achieved when the audit committee chairperson promotes open and proactive dialogue with management and other governance committees. During the preparation of this guide, interviewees described various practices that are likely to have a positive effect on the performance of an audit committee. Based on those interviews and the international literature about audit committees we reviewed, we consider good practice to be:

• the audit committee chairperson being responsible for setting and approving the agenda, which would have been prepared with senior staff;
• the audit committee chairperson and the head of internal audit having regularly scheduled meetings, outside audit committee meetings;
• the chief executive and audit committee chairperson meeting outside audit committee meetings;
• internal and external auditors being able to attend audit committee meetings, without any members of the management team being present;
• “committee-only” time, which enables audit committee members to discuss issues and questions without the chief executive or staff being present; and
• the audit committee ensuring that requests it makes of management are reasonable and cost-effective to implement.

3.26
These steps help to foster a productive and effective working environment for management and the audit committee. Both are likely to get the best value from the time and resources invested in the audit committee.