|The Board should establish an Audit Committee ("AC") with written terms of reference which clearly set out its authority and duties9.|
The Audit Committee (AC) is the only Board committee that is mandated and required by law for listed companies (Section 201B(1) of the Companies Act). The others (BRC, RC and NC) are recommended to be set up in the Code.
The AC is a critical entity as it manages risk, and ensures good internal controls and the integrity of the financial reports. It is often viewed as the company’s last line of defence against fraud.
The Guidelines describe the:
- Composition and disclosure requirements of an AC (Guideline 12.1).
- Competencies required of AC members (Guidelines 12.2).
- Authority and powers of the AC (Guideline 12.3).
- Duties of the AC (Guideline 12.4).
- Requirement for the AC to have private sessions with the internal auditor and external auditor (Guideline 12.5).
- Need to monitor the independence of, and the potential impact of, non-audit services by the external auditor (Guideline 12.6).
- Policies and arrangements for raising concerns about improprieties in the company (Guideline 12.7).
- Disclosure of the AC’s activities and its measures to stay current with accounting standards (Guideline 12.8).
- Restrictions on former audit partners functioning as AC members (Guideline 12.9).
The Board may wish to refer to the sample terms of reference contained in the Guidebook for Audit Committees in Singapore issued by the Audit Committee Guidance Committee which was established on 15 January 2008 by the Monetary Authority of Singapore, the Accounting and Corporate Regulatory Authority and Singapore Exchange Limited to develop practical guidance for audit committees of listed companies. [Post Note: The Audit Committee Guide, produced by SID with the support of ACRA, MAS and SGX and issued in January 2017, replaces the Guidebook for Audit Committees in Singapore. The AC and ARC terms of reference may be found as Appendices 1C and 1D of the AC Guide.]
The AC should comprise at least three directors, the majority of whom, including the AC Chairman, should be independent. All of the members of the AC should be non-executive directors. The Board should disclose in the company's Annual Report the names of the members of the AC and the key terms of reference of the AC, explaining its role and the authority delegated to it by the Board.
The Board should ensure that the members of the AC are appropriately qualified to discharge their responsibilities. At least two members, including the AC Chairman, should have recent and relevant accounting or related financial management expertise or experience, as the Board interprets such qualification in its business judgement.
The AC should have explicit authority to investigate any matter within its terms of reference, full access to and co-operation by Management and full discretion to invite any director or executive officer to attend its meetings, and reasonable resources to enable it to discharge its functions properly.
The duties of the AC should include:
- reviewing the significant financial reporting issues and judgements so as to ensure the integrity of the financial statements of the company and any announcements relating to the company's financial performance;
- reviewing and reporting to the Board at least annually the adequacy and effectiveness of the company's internal controls, including financial, operational, compliance and information technology controls (such review can be carried out internally or with the assistance of any competent third parties);
- reviewing the effectiveness of the company's internal audit function;
- reviewing the scope and results of the external audit, and the independence and objectivity of the external auditors; and
- making recommendations to the Board on the proposals to the shareholders on the appointment, re-appointment and removal of the external auditors, and approving the remuneration and terms of engagement of the external auditors.
The AC should meet (a) with the external auditors, and (b) with the internal auditors, in each case without the presence of Management, at least annually.
The AC should review the independence of the external auditors annually and should state (a) the aggregate amount of fees paid to the external auditors for that financial year, and (b) a breakdown of the fees paid in total for audit and non-audit services respectively, or an appropriate negative statement, in the company's Annual Report. Where the external auditors also supply a substantial volume of non-audit services to the company, the AC should keep the nature and extent of such services under review, seeking to maintain objectivity.
The AC should review the policy and arrangements by which staff of the company and any other persons may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The AC's objective should be to ensure that arrangements are in place for such concerns to be raised and independently investigated, and for appropriate follow-up action to be taken. The existence of a whistle-blowing policy should be disclosed in the company's Annual Report, and procedures for raising such concerns should be publicly disclosed as appropriate.
The Board should disclose a summary of all the AC's activities in the company's Annual Report. The Board should also disclose in the company's Annual Report measures taken by the AC members to keep abreast of changes to accounting standards and issues which have a direct impact on financial statements.
A former partner or director of the company's existing auditing firm or auditing corporation should not act as a member of the company's AC: (a) within a period of 12 months commencing on the date of his ceasing to be a partner of the auditing firm or director of the auditing corporation; and in any case (b) for as long as he has any financial interest in the auditing firm or auditing corporation.