A work group of the French Institute has compiled '100 Bonnes Pratiques Pour Guider le Comité d'Audit' ('100 Best Practices for Audit Committees'). Aldo Cardoso, chair of audit committees at hotel group Accor, energy producer Gaz de France, minerals group Imerys and chemicals producer Rhodia, all based in Paris, chaired the French Institute group. The work group included audit committee chairmen and audit committee members who act or previously acted as CEO or CFO within significant French and international groups.
"The key objective is to promote a working tool, a starting point for dialogue and exchange between the audit committee and the board, as well as between the audit committee and management," Cardoso says. The ideas are intended to apply to all companies.
The work group examined audit committees for CAC-40 Index companies, an index of 40 companies listed on the Paris Bourse (now part of NYSE-Euronext). Surveying work group members on practices they considered essential or optional, the work group determined the 100 most critical areas of practice.
According to Didier de Menonville, a partner with KPMG in France, director of KPMG's Audit Committee Institute and secretary of the working group, the approach taken was designed to develop robust guidelines that recognize and avoid key pitfalls. Those include a 'checklist approach', and the fact they respect the separate prerogatives of the audit committee and management. The working group identified three main areas for the audit committee: accounts and financial information; risk management and internal control systems; and internal and external audit.
The audit committee is charged with assuring compliance with legal and regulatory norms in regards to accounts and financial information. It considers the most sensitive and challenging areas, including change of accounting methods, choice of accounting options, and change or loss of value.
In terms of control of financial information, the audit committee should intervene before each regular meeting, and, in the case of a crisis or a change, meet with management and agree on a strategy. (The work group notes that some companies believe financial communication is strictly the prerogative of management.)
When it comes to risk management and supervision of an internal controls system, the audit committee should ensure management has the best controls in place and that the system works. The survey of CAC-40 companies revealed a great disparity in the approaches to risk management and internal controls supervision.
For oversight of internal and external audits, the audit committee should ensure that communication between the two is constant and effective. For internal audit, the audit committee should be involved before the start in reviewing the internal audit plan.
As for the external auditor, the audit committee should ensure the existence of procedures for selecting the external auditors, along with an examination of the policies to be adopted. The audit committee needs to examine significant disagreement between external auditors and the board.
In developing the '100 Best Practices' document, the working group examined these and other key issues in detail, with a focus on providing practical insights. Some of the practices include the frequency of audit committee meetings and the theory behind how the audit committee should evaluate the internal control system and risk management processes.
And while approaches and practices vary, one constant does emerge — the need for a high level of professionalism on the part of audit committee members.
"The level of sophistication in financial matters required the complexity of accounting rules to be dealt with, and the high level of specialization require people having expertise in those fields and aware of the main characteristics of the various activities of the company," says Patrice Marteau, president of the audit committees at the Milan-based fashion producer Gucci Group and at the Paris-based bookseller FNAC.
The 100 Best Practices for Audit Committees is designed to help audit committee members cope with the extended level of demand, and to evaluate a strategy for becoming most effective according to the needs of the board and management at the companies where they are appointed.