There has been some debate about the actual effectiveness of audit committees. Whether they are actually helpful or have become a formality. With strong thoughts on the subject, we would like to let the public know why audit committees matter, and why they are effective.

 

Why audit committees matter

Audit committees matter for a number of reasons but by far the most important one is that they are unbiased. That fact alone is enough to warranty the creation of audit committees, especially those that are comprised of members that belong to the organization being audited. These members are able to accurately gauge the position that the organization is in without sugarcoating anything.

They have no loyalty to the organization but rather to the task that they are given, which is to identify key strengths and weakness, and how those can be improved and worked on. That makes auditing attractive for larger corporations who cannot keep track of everything at once. Such organizations can expect a fair report on everything, knowing that it comes from people that make a living out of it and thus have far more experience than any audit committee that they themselves could form from members of the organization.

Audit committees are also necessary from a financial standpoint. They can judge what aspects of the business impact financial systems or financial reports and thus can let the organization know about the risks that they could face in the coming future. That aspect may seem unimportant because financial systems are mostly reliant on direct function, functions that are visible to all and can be judged really easily. That may be true in many cases but does not apply to all organizations, especially those that exist in the public sector i.e. the government sector. These organizations are complicated, multifaceted, and interlinked with each other. That makes their financials complex at best and nigh unintelligible at worst. Researching, analyzing, and reporting on data in such an organization is impossible for one man. It is extremely difficult for people from the organization as the results can be skewed because of loyalty bias. It is manageable by third-party audit committees because there is no bias to be found.

Why are audit committees effective?

Audit committees are effective for one simple reason, they break down the company to pure information. Information that cannot be manipulated or skewed. The presence of a committee ensures that just one person is not in charge of everything. Having an equal committee ensures that only the most relevant information makes it into the final audit report. It removes the human element which is integral for organizations looking to get a perfect picture of their organization and how well it is performing.

Audit committees also make sure that none of the important information is left out. The decisions that each member takes are analyzed by others so that there is a constant safeguard against bias or manipulation. In short, culpability is high in audit committees which ensure compliance with industry standards at all times.