Legal Definitions - audit committee

An audit committee is a specific group of individuals selected from a company's board of directors. Its main responsibility is to oversee the company's financial reporting processes, internal controls, and the work of its independent external auditors. For publicly traded companies, having an audit committee is a legal requirement, established to protect investors and ensure the accuracy and reliability of financial information released to the public. Members of the audit committee must be independent, meaning they generally do not have other significant financial relationships with the company beyond their board service, which helps ensure their objectivity in overseeing financial matters.

• Example 1: A major publicly traded software company is preparing its annual financial statements. The audit committee meets regularly with the company's internal finance team and its external auditing firm. They review the company's accounting policies, discuss any significant financial judgments, and scrutinize the auditor's findings before the financial results are publicly announced.

  Explanation: This illustrates the audit committee's role in overseeing both the company's financial reporting processes and the work of its external auditors, ensuring the integrity and accuracy of the information presented to shareholders and regulators.

• Example 2: A large retail corporation faces allegations from a whistleblower claiming that certain sales figures were intentionally inflated in past quarterly reports. The audit committee would be responsible for initiating and overseeing an independent investigation into these allegations, ensuring that any financial misconduct is thoroughly examined and addressed.

  Explanation: This demonstrates the audit committee's critical function in overseeing the company's financial integrity and disclosures, particularly when serious concerns about the accuracy of financial information arise.

• Example 3: A fast-growing biotechnology startup has recently gone public and is establishing its first robust set of internal financial controls. The audit committee plays a key role in reviewing and approving these new control systems, selecting a reputable external auditing firm for the first time as a public entity, and ensuring the company's compliance with all financial reporting regulations set by the Securities and Exchange Commission (SEC).

  Explanation: This highlights the audit committee's responsibility in establishing and maintaining strong financial governance, selecting and monitoring auditors, and ensuring compliance with regulatory requirements, especially crucial for companies transitioning to public ownership.