If Your Business Lacks Financial Skills ……

Financial skills are in short supply and are expensive. In the Small and Medium Enterprise (SME) segment this can adversely impact on many businesses. It must also be remembered that in terms of fiduciary duties and responsibilities, directors and senior management are expected to have a firm grip on the entity they manage. 

Financial skills are fundamental to a business and lacking them can expose directors and senior managers to increased personal risk and liabilities. 

One way to bridge this gap is by setting up informal audit committees.

Who is obliged to have an Audit Committee and what does it do?  

The new Companies Act requires public companies, state-owned companies and any companies whose Memoranda of Incorporation specify it, to set up an audit committee. Three non-executive directors are the minimum number of members of the committee. 

The main functions of the audit committee are to -
  • Nominate an independent auditor and ensure the auditor remains independent

  • To establish the auditor's terms of engagement and agree the audit fee

  • Determine and approve any non-audit work to be done by the auditor

  • Review internal controls, accounting policies and the annual audited financial statements

  • Comment on the records and financial reports of the company. 

Can an informal Audit Committee help your business?

Whilst the Companies Act does not require most SMEs to form an audit committee and many SMEs do not even have an audit, entities with limited financial skills can still make good use of this concept. 

Consider having an informal audit committee which would meet just prior to board meetings. It could comprise of, say, an executive director and one or two retired accountants. The committee would meet with your accountant/bookkeeper and review internal controls, management accounts, budgets, the annual financial statements, and it could manage the audit (if the business has an audit). This committee could also oversee the risk process, future cash flows, governance and any other tasks given it by the board. 

The chairperson of your audit committee can then report to the board on the state of the entity’s finances and accounts.  This will give the owners and senior management feedback on how well the financial department is doing plus advice on company finances. The audit committee is designed to give management assurance that their finances and accounting systems are in order.

The costs of paying a couple of accountants for, say, three meetings a year will help reduce risk and potential liabilities, plus it will almost certainly yield a positive return.

Take advice!

Speak to your accountant for advice on how to set up and run such a committee.
The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.