AUDIT COMMITTEES FOR NON-PUBLIC COOPERATES
BY ROBERT G. HENSLEY
Reprinted with Permission of the Cooperative Business Journal
The origin of the modern audit committee dates back to 1939 when the New York Stock Exchange recommended that public companies have an audit committee. The role of the audit committee has evolved over time, and not the Sarbanes-Oxley Act requires public companies, including cooperatives that register their stock with the Securities and Exchange Commission, to have an audit committee.
Sarbanes-Oxley provides that: The audit committee of each issuer, in its capacity as a committee of the board of directors, shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work, and each such registered public accounting firm shall report directly to the audit committee.
Sarbanes-Oxley does not require that private cooperatives those that do not register their stock have an audit committee. A recent survey by the National Association of Corporate Directors, however, found that 80 percent of private companies have an audit committee.
Frequently, the bylaws of a cooperative will contain a provision requiring an audit committee, or it may be that your lender has required one. In addition, following the passage of Sarbanes-Oxley, most auditing firms are strongly recommending that Private companies, such as cooperatives, have an audit committee. Likewise, most auditing firms are applying the same audit standards used for public companies to private cooperatives, further blurring the line of what is required by law and what is viewed to be a “best practice.”
In addition to federal requirements, recently enacted state laws or those under consideration require an audit committee for a private cooperative. For example, a cooperative formed under Minnesota Statute 308B.445 must have an audit committee. In addition, California has adopted a statute that mirrors some of the Sarbanes-Oxley requirements and has proposed legislation that would apply to private companies, including private cooperatives.
The Audit Committee Charter
Once a cooperative has established an audit committee, it should adopt a charter or other policy outlining the function of the committee. Even if the cooperative does not have a separate audit committee, the board is by default performing the function of the audit committee, and it should consider adopting a policy that essentially mirrors the charter that would be followed if the cooperative did have a separate audit committee.
The audit committee should meet two to four times a year or more often if dictated by circumstances. The purpose of a charter is to outline the responsibilities of the audit committee so that the committee members are clear about their task. In general, the audit committee is appointed to assist the board in monitoring:
The integrity of the financial statements of the cooperative.
Compliance with legal and regulatory requirements.
The independence and performance of the cooperative’s internal and external auditors.
An audit committee charter is usually three to five pages. The role of the audit committee can be broken down into several components, some of which are outlined below.
Hiring the Independent Auditor
Review the experience and qualifications of the auditing team.
Hire or recommend to the board the hiring of an auditor.
Approve the retention of the auditor for any non-audit services.
Approve the fees paid to the auditor.
Consider or establish a policy rotating the lead audit partner.
Planning & Supervising the Audit
Meet with the auditor to review the planning and staffing of the audit.
Review the auditor any significant risk exposures.
Get the auditor’s view on whether management’s choice and application of accounting principles is aggressive, moderate, or conservative.
Get the auditor’s view about the clarity of management’s financial disclosure practices.
Meet periodically in separate sessions with management and the auditor to discuss any matters the committee believes should be discussed privately.
Instruct the auditor that auditors are ultimately accountable to the board of directors, through the audit committee.
Review the results of the audit with the auditor and management.
Review with the auditor any difficulties the auditor may have encountered and any management letter provided by the auditor as well as the cooperative’s response to that letter.
Interaction with Management
Meet at least annually with the chief financial officer.
Obtain annual certifications from the CEO and CFO that they have made appropriate financial disclosures to the auditor and the audit committee.
Review the cooperative’s major financial risk exposures and the steps management has taken to monitor and control such exposures.
Review the audited financial statements with management.
Establish and periodically review a whistle blower policy.
Establish and periodically review a Code of Ethics. It is not unusual for a private cooperative to have the board perform the function of the audit committee. The time burden on directors, however, may require establishing a separate audit committee.
The typical audit committee contains three to five members. Sarbanes-¬Oxley requires a public company to disclose whether the audit committee contains a financial expert. An audit committee for a private cooperative should be made up of individuals with a range of talents, including those who: Have a financial background and accounting expertise.
Are independent of management and are willing to ask probing questions.
Have relevant business experience.
Reporting to the Board
The audit committee should keep written minutes of its meetings. While they do not need to be a verbatim transcript, the minutes should identify the people present, the items discussed, and the decisions reached by the committee.
Acting through its chair, the audit committee may elect to make a verbal report at board meetings. The report should be recorded in board meeting minutes.
Instead of verbal reports, many audit committees submit a written report to the board. This allows the report to be reviewed for completeness by all audit committee members before submission to the board.
Most cooperatives conduct an annual independent audit of their financial statements. Even when the board is responsible for hiring and supervising the auditors, the cooperative should have a written policy in place that governs who the audit is conducted.
If the cooperative has formed a separate audit committee, the board should establish a charter so that the functions and expectations of the committee are clear. The charter also serves as a checklist for the audit committee during the course of the year. Adopting a written charter should add a level of consistency from year to year with regard to audit committee tasks, hopefully leading to more consistent accounting and audit review practices.
Robert G. Hensley is a partner with the law firm of Dorsey & Whitney LLP in Minneapolis. He represents agribusinesses, cooperatives and companies throughout the United States. He can be reached at (612) 340-2655 or at email@example.com.
Volume 1, Issue 5