The UK Financial Reporting Council has issued new guidance to audit committee, making clear that audit committees have a special duty to shareholders. "While all directors have a duty to act in the interests of the company the audit committee has a particular role, acting independently from the executive, to ensure that the interests of shareholders are properly protected in relation to financial reporting and internal control," the guidance states. That role is described quite consciously in terms of oversight, rather than action, and the FRC is quick to note that nothing in its guidance should detract from the notion of a unitary board. "However, the high-level oversight function may lead to detailed work. The audit committee must intervene if there are signs that something may be seriously amiss," it says. "For example, if the audit committee is uneasy about the explanations of management and auditors about a particular financial reporting policy decision, there may be no alternative but to grapple with the detail and perhaps to seek independent advice."Cognitive conflict? This approach may not threaten the unitary board. UK companies have lived with increasingly independent audit committees since the Cadbury Report in 1992, and when audit committee members join meeting of the full board they live with the internal conflict of overseeing the accounts as well as contributing to the policies that go into to making them. But stressing the independence of the audit committee involves stressing the role for cognitive conflict between board members, which can lead to divisions. Audit committee members will need to do more work than other board members, and the FRC thinks they should be paid more, too. Financial expertise comes at a premium.
Source document: The FRC audit committee guidance is a 28-page pdf file.
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