A committee made up of some of the members of a company’s board of directors that is responsible for the overall management of the auditing process and the auditors. The audit committee assists the board of directors in overseeing the integrity of the company’s financial statements and also may be involved with legal and regulatory compliance, including the internal audit function. The board of directors appoints the audit committee. The audit committee also recommends whether shareholders should approve the choice of an independent auditor.
Under the 2002 Sarbanes-Oxley legislation, members of an audit committee must be independent directors. This means those members cannot be company executives and they must limit business involvement between their employer and the company on whose board they serve. The rules also require that the board of directors evaluate whether a board member serving simultaneously on more than two companies’ boards would impair an audit member’s performance; membership on different audit boards must be disclosed in the company’s proxy statement. In addition, the rules require that at least one member have significant financial expertise, although exactly what constitutes significant financial expertise is left up to the companies.
The Sarbanes-Oxley law requires companies to have an internal audit function, which may be outsourced to independent auditors. The audit committee also is required to have a charter that specifies the purpose, duties, and evaluation procedures of the committee.