The Board and Audit Committee: Enhancing the Board and Audit Committee Role

The Board and Audit Committee: Enhancing the Board and Audit Committee Role
Being a Virtual Training presented to Institute of Chartered Secretaries and Administrators of Nigeria (ICSAN) on Thursday 27th July, 2023

1. The Board and Audit Committee: Enhancing the Board and Audit Committee Role Being a Virtual Training presented to Institute of Chartered Secretaries and Administrators of Nigeria (ICSAN) on Thursday 27th July, 2023 Prof. Godwin Emmanuel Oyedokun Professor of Accounting and Financial Development Department of Management & Accounting Faculty of Management and Social Sciences Lead City University, Ibadan, Nigeria Principal Partner; Oyedokun Godwin Emmanuel & Co (Chartered Accountants, Tax Practitioners & Forensic Auditors)

2. ND (Fin), HND (Acct.), BSc. (Acct. Ed), BSc (Fin.), BSc. (Bus. Admin), MBA (Acct. & Fin.), MSc. (Acct.), MSc. (Bus & Econs ), MSc (Tax), MTP (SA), PhD (Acct), PhD (Fin), PhD (FA), FCA, FCTI, FCIB, ACS, ACIS, MNIM, FCNA, FCFIP, FCE, FERP, CICA, CFA, CFE, CIPFA, CPFA, ACAMS, ABR, CertIFR , IPA, IFA, FFAR, FPD-CR, FSEAN, FNIOAM, ACIrb

3. The Board and Audit Committee: Enhancing the Board and Audit Committee Role

4. Contents

5. Introduction

6. Introduction

7. Board of Directors Overview

8. Board of Directors Overview

9. Board of Directors Sect. 87 (1)-(6) (CAMA 2020) Provisions A company shall act through its members in general meeting or its board of directors or through officers or agents appointed by, or under authority derived from, the members in general meeting or the board of directors. Subject to the provisions of this Act, the respective powers of the members in general meeting and the board of directors shall be determined by the company’s articles. Except as otherwise provided in the company’s articles, the business of the company shall be managed by the board of directors who may exercise all such powers of the company as are not by this Act or the articles required to be exercised by the members in general meeting. Unless the articles otherwise provide, the board of directors, when acting within the powers conferred upon them by this Act or the articles, is not bound to obey the directions or instructions of the members in general meeting provided that the directors acted in good faith and with due diligence.

10. Board of Directors Sect. 87 (1)-(6) (CAMA 2020) Provisions 5. Notwithstanding the provisions of subsection (3), the members in general meeting may:
(a) act in any matter if the members of the board of directors are disqualified or unable to act because of a deadlock on the board or otherwise;
(b) institute legal proceedings in the name and on behalf of the company, if the board of directors refuse or neglect to do so;
(c) ratify or confirm any action taken by the board of directors; or
(d) make recommendations to the board of directors regarding action to be taken by the board. 6. No alteration of the articles invalidates any prior act of the board of directors which would have been valid if that alteration had not been made.

11. Functions of the Board i. Establishing vision, mission and values a. Determining board composition and organisation
b. Clarifying board and management responsibilities
c. Planning and managing board and board committee meetings
d. Developing the effectiveness of the board ii. Setting strategy and structure a. Review and evaluate present and future opportunities, threats and risks in the external environment; and current and future strengths, weaknesses and risks relating to the company.
b. Determine strategic options, select those to be pursued, and decide the means to implement and support them.
c. Determine the business strategies and plans that underpin the corporate strategy.
d. Ensure that the company’s organisational structure and capability are appropriate for implementing the chosen strategies.
e. Determine the company’s appetite for risk and to engage in the process of backing a robust risk management programme focused in the company’s business and the area(s) of its activities.

12. Functions of the Board iii. Delegating to management a. Delegate authority to management, and monitor and evaluate the implementation of policies, strategies and business plans
b. Determine monitoring criteria to be used by the board
c. Ensure that internal controls are effective
d. Communicate with senior management iv. Exercising accountability to shareholders and being responsible to relevant stakeholders. a. Ensure that communications both to and from shareholders and relevant stakeholders are effective
b. Understand and consider the interests of shareholders and relevant stakeholders.
c. Monitor relations with shareholders and relevant stakeholders by the gathering and evaluation of appropriate information
d. Promote the goodwill and support of shareholders and relevant stakeholders

13. Responsibilities and Challenges of the Board It is for the board to judge, on a case-by-case basis, which stakeholders it treats as ‘relevant’ and which of their interests it is appropriate to meet, considering the law, relevant regulations and commercial considerations In pursuing this key purpose, a board of directors faces a uniquely demanding set of responsibilities and challenges It also faces a range of objectives that can sometimes seem contradictory as follows:
i. Must simultaneously be entrepreneurial and drive the business forward while keeping it under prudent controls.
ii. It is required to be sufficiently knowledgeable about the workings of the company to be answerable for its actions, yet able to stand back from the day-to-day management of the company and retain an objective, longer-term view.
iii. Must be sensitive to the pressures of short-term issues and yet take account of broader, long-term trends.
iv. Must be knowledgeable about ‘local’ issues and yet be aware of potential or actual wider competitive influences. It is expected to be focused on the commercial needs of its business while acting responsibly towards its employees, business partners and society.

14. The Background of Audit Committee

15. The Background of Audit Committee

16. Concept of Audit Committee

17. Concept of Audit Committee In addition to independence, competency is also taken into consideration as regards the composition of audit committee members The big four CPA firms, Price Waterhouse Coopers, Deloitte, Ernst & Young, and KPMG, as well as the Committee of Sponsoring Organizations (COSO) recommended certain oversight practices for audit committees to follow, providing guidelines about the audit responsibility in evaluating and strengthening corporate controls The SEC confirmed its interest in audit committees by:
i. Urging registrants to form audit committees comprised of outside directors; ii. Requiring all publicly held companies’ proxies to disclose information about the existence and composition of their audit committees; iii. Requiring publicly held companies to state the number of audit committee meetings held annually and to describe their audit committees’ function .

18. Audit Committee in Corporate Governance

19. Composition of Audit Committee (Comparative Analysis Between the Old and New CAMA)

20. Composition of Audit Committee (Comparative Analysis Between the Old and New CAMA) con’t This provision is in line with the principles of the Nigerian Code of Corporate Governance 2018 which provides that at least one member of the audit committee should be “…a financial expert…have current knowledge in accounting and financial management and be able to interpret financial statements” i. Public companies should review the composition of their audit committees to ensure conformity with the provisions of CAMA 2020 with respect to the number and qualification of the committee members. ii. The audit committee shall examine the auditors’ report and make recommendations thereon to the annual general meeting as it may deem fit. iii. All members of the audit committee shall be financially literate, and at least one member shall be a member of a professional accounting body in Nigeria established by an Act of the National Assembly. iv. Any member may nominate another member of the company to the audit committee by giving written notice of such nomination to the secretary of the company at least 21 days before the annual general meeting and any nomination not received prior to the meeting as stipulated is invalid

21. Functions and Powers of Audit Committee

22. Responsibilities of Audit Committees

23. Responsibilities of Audit Committees

24. Responsibilities of Audit Committees

25. Internal and External Auditors Internal Audit Internal audit is an independent function within the organization or the company, which comprises a team of professionals who perform the audit of the internal controls and processes of the company or the organization Senior management and the board determine the role the internal audit activity will play in the organizational risk management process In most organizations, internal auditors have a key role in evaluating the effectiveness of enterprise risk management and recommending improvements Components of Internal Audit i. Internal audit staff are employees, but they are not part of the management of the organization or the company. It means that they do not perform business activities or take part in performing the operations of the company.
ii. The internal audit department works as an independent department and reports to the board of directors committee and the board audit committee (BAC).
iii. The internal audit department performs an audit of the processes and controls of the departments and functions of the organization or the company.
iv. Internal audit observations are identified and reported by the internal auditors in the internal audit reports.
v. Significant audit observations are reported by the head of internal audit or the chief internal auditor (CIA) to the board audit committee (BAC) periodically.
vi. Internal auditing is a continuous process that is based on the internal control systems of any size business.

26. Internal and External Auditors External Audit External auditors are the independent third party or a body of professionals who perform the statutory audit of the financial statements of the organizations or the companies The external audit is the necessary activity that is performed by external auditors to provide an independent opinion on the financial performance and financial position of the company Components of External Audit i. External auditors are not related to or part of the management of the company being audited.
ii. They are required to maintain independence. Independence means the performance of audit activities and procedures without any influence by the board of directors or the management of the company.
iii. External auditors are qualified professionals in the field of finance and audit.
iv. Their audit activities and audit reports are considered very reliable by the shareholders and other stakeholders of the company.
v. The scope of external audit is limited to the financial statements of the organization or the company which is under audit.
vi. External audit in most cases is the statutory requirement shared with relevant stakeholders of the company.
vii. External auditors are required to apply the audit procedures on the financial information and transactions of the company that occurred during the past period. viii. External auditors are required to obtain sufficient appropriate audit evidence to support the audit opinion on the financial statements of the organization or company

27. Roles of Internal and External Auditors i. Internal auditors will investigate issues concerning the company’s business practices and risks, while external auditors will examine the financial records and issue an opinion on the company’s financial statements ii. Internal audits are performed throughout the year, while external auditors perform a single annual audit. iii. Internal auditors work within a company and report to the audit committee or the board of directors while external auditors are not affiliated with the organization they are auditing and are accountable to the company’s shareholders. iv. Internal auditors contribute to the design of the company’s organizational systems as well as the development of specific risk management policies while external auditors work on a test basis to monitor the systems in place. v. Internal auditors ensure that all risk management policies are in place and working properly while external auditors offer their expert opinion of truth and fairness on the accuracy of the company’s financial statements.

28. Roles of Audit Committee in enhancing good Corporate Governance i. Roles of Audit Committee in Internal Control Internal control is defined by Committee of Sponsoring Organisations (COSO) 1992 as “process affected by entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: a) effectiveness and efficiency of operations
b) reliability of financial reporting
c) compliance with laws and regulations Internal control structure includes policies, procedures, and practices followed by the organization to control its operations, particularly its financial part, and to ensure the organization’s compliance with the valid and relevant laws and regulations, as well as the organization’s own bylaws and resolutions Even though it is well-known that the internal control structure cannot prevent or detect all errors and irregularities, organizations establish and maintain such structure for the purpose of providing reasonable, not absolute, assurance regarding the integrity of management, as well as the accuracy and reliability of financial reporting The audit committee receives reports about the internal contro l’s effectiveness and efficiency from the organization’s management, i nternal and external auditors

29. Roles of Audit Committee in enhancing good Corporate Governance ii. Relationship between Audit committee and Internal Auditors The relationship between the audit committee and internal auditors, and the consequent effects, are supported by many research findings A study earlier conducted show that independence and accounting experience have a complementary effect on the relationship between audit committee and internal audit Zain et al. also found that more effective audit committees and well-resourced internal audit units tend to be positively associated with the assessment of the internal auditors’ contribution to the external audit In addition, Asare found that internal auditors in both a self-assessment role and a due diligence role are sensitive to variations in audit committee quality

30. Roles of Audit Committee in enhancing good Corporate Governance iii. Roles of Audit Committee in External Audit The external audit tasks are directly related to the audit committee activities The scope of the external audit function is determined by the audit committee The audit committee plays a major role in selecting the external auditors since it nominates them, asks them to submit their proposals regarding the audit process, then it recommends to the organization’s board of directors whom it sees are the best to perform the external audit In a public-interest entity, the proposal of the administrative or supervisory body for the appointment of a statutory auditor or audit firm shall be based on a recommendation made by the audit committee The statutory auditor or audit firm shall report to the audit committee on key matters arising from the statutory audit, and on material weaknesses in internal control in relation to the financial reporting process as :
i. The audit committee assists in selecting the external auditor to audit and/or review the acco unts and issue his/her opinion about the correctness and accuracy of the reports.
ii. Changing the external auditor also requires direct interference by the audit committee.
iii. T o protect and preserve the shareholders’ interests, the audit committee oversees the nature and scope of work of the external auditors, evaluates their effectiveness, and recommends the proper audit fees that should be paid to them.
iv. The audit committee assists in ensuring that the external auditors are independent, and that there is no conflict of interest which may weaken the exter nal auditors’ ability of issuing their opinion. v. The external auditors submit their reports to the audit committee where both parties discuss important issues, such as management’s errors, irregularities, and fraud.

31. Roles of Audit Committee in enhancing good Corporate Governance iv. Role of Audit Committee in Accounting and Financial Reporting One of the main responsibilities of the audit committee is to oversee the financial reporting process to enhance the quality of this process The audit committee is responsible for monitoring the organization’s accounting policies, principles, and practice It reviews the organization’s financial statements monthly, quarterly, and/or annually according to the organization’s size, system, and nature of business The audit committee members often discuss with management the accounting standards and principles, as well as accounting estimates and judgments made by management The audit committee interacts regularly with the organization’s chief financial officer, controller, and finance manager, and report on the capabilities and competence of these managers The audit committee may direct a special investigation when significant problems with accounting practices or personnel is identified or alleged The external auditors are required to report to the committee on their views on management's selection of accounting principles, accounting adjustments made by management or external auditors, any disagreement or difficulties encountered in working with management, and any identified fraud, irregularities, or illegal acts Audit committee is a very important link between the organization’s financial reporting function and its external constituents; con sequently, when this link is compromised, it may lead to large corporate governance problems

32. Roles of Audit Committee in enhancing good Corporate Governance v. Role in Role in Regulatory Compliance The audit committee is responsible for overseeing the organization’s disclosure process, ensuring that the organization complies with the relevant local and international laws, implementing regulations and ethical standards and principles, and complying with the organization’s bylaws and internal guidelines The audit committee discusses with the organization’s management, attorney, and general counsel any litigation or regulatory compliance risks Large corporations may also have a chief compliance officer or ethics officer with whom the audit committee may discuss reported incidents or risks related to the entity's code of conduct

33. Roles of Audit Committee in enhancing good Corporate Governance vi. Role in Risk Management The audit committee discusses with the organization ’ s management the policies and practices used to identify, prioritize, and respond to the risks that threaten the achievement of the organization's objectives or opportunities that enhance the achievement of such objectives Many organizations develop their practices towards a risk-based management approach, called Enterprise Risk Management (ERM) In this regard, Contesrotto and Moroney (2014) found that there is a negative correlation between audit committee effectiveness and audit risk since the audit committee plays a major role in improving financial statement integrity The audit committee is also involved in non-financial risk assessment

34. Roles of Audit Committee in enhancing good Corporate Governance vii. Role of Audit Committee in Accounting and Financial Reporting One of the main responsibilities of the audit committee is to oversee the financial reporting process to enhance the quality of this process The audit committee is responsible for monitoring the organization’s accounting policies, principles, and practice It reviews the organization’s financial statements monthly, quarterly, and/or annually according to the organization’s size, system, and nature of business The audit committee members often discuss with management the accounting standards and principles, as well as accounting estimates and judgments made by management The audit committee interacts regularly with the organization’s chief financial officer, controller, and finance manager, and report on the capabilities and competence of these managers The audit committee may direct a special investigation when significant problems with accounting practices or personnel is identified or alleged The external auditors are required to report to the committee on their views on management's selection of accounting principles, accounting adjustments made by management or external auditors, any disagreement or difficulties encountered in working with management, and any identified fraud, irregularities, or illegal acts According to Bolton (2014), the audit committee is a very important link between the organization’s financial reporting function and its external constituents; con sequently, when this link is compromised, it may lead to large corporate governance problems

35. Roles of Audit Committee in enhancing good Corporate Governance viii. Role in Role in Regulatory Compliance The audit committee is responsible for overseeing the organization’s disclosure process, ensuring that the organization complies with the relevant local and international laws, implementing regulations and ethical standards and principles, and complying with the organization’s bylaws and internal guidelines The audit committee discusses with the organization’s management, attorney, and general counsel any litigation or regulatory compliance risks Large corporations may also have a chief compliance officer or ethics officer with whom the audit committee may discuss reported incidents or risks related to the entity's code of conduct

36. Roles of Audit Committee in enhancing good Corporate Governance ix. Role in Risk Management The audit committee discusses with the organization ’ s management the policies and practices used to identify, prioritize, and respond to the risks that threaten the achievement of the organization's objectives or opportunities that enhance the achievement of such objectives Many organizations develop their practices towards a risk-based management approach, called Enterprise Risk Management (ERM) In this regard, Contesrotto and Moroney (2014) found that there is a negative correlation between audit committee effectiveness and audit risk since the audit committee plays a major role in improving financial statement integrity The audit committee is also involved in non-financial risk assessment.

37. Ways to Enhance the Board and Audit Committee Role

38. Ways to Enhance the Board and Audit Committee Role

39. Conclusion

40. Recommendation

41. Prof. Godwin Emmanuel Oyedokun Professor of Accounting and Financial Development Lead City University, Ibadan, Nigeria Principal Partner; Oyedokun Godwin Emmanuel & Co (Chartered Accountants, Tax Practitioners & Forensic Auditors) [email protected] ; [email protected] [phone], & [phone]