2.3. Financial statements

The review by the Audit Committee of the entity’s financial statements and advising the Chief Executive/Board on the results of the committee’s review is an important responsibility of all Audit Committees.

To be able to perform this role effectively, it is important that the Audit Committee is advised, on an ongoing basis throughout the year (and not just at year-end) of significant issues that may affect the financial statements. This would include accounting and financial reporting issues identified by management, internal audit or external audit. Where such matters are identified, the Audit Committee should seek assurance from management that the issues are being adequately addressed in a timely manner so that, to the extent possible, they do not impact adversely on the entity’s ability to prepare its financial statements to the required standard and within the agreed timeframe. The timely consideration of any such issues will help engender a policy of ‘no surprises’.

There can often be benefits in an Audit Committee establishing a financial statements sub-committee to assist it in meeting its financial statement responsibilities. Such a sub-committee is able to dedicate time to interacting with management on the planning for, and preparation of, an entity’s financial statements, including being satisfied with the resolution of any significant issues that may affect the timely completion of the preparation and audit of the statements. However, the use of a financial statements sub-committee does not abrogate the Audit Committee’s responsibilities, and the Audit Committee should specify the sub-committee’s reporting arrangements to the full committee.

The judgement in ASIC v Healy & Ors [2011] FCA 717 (the Centro Case), highlighted the responsibilities that directors have in relation to a company’s financial statements, including the extent to which directors are entitled to rely on specialist advice and others in discharging their duties.  The general principles covered by the judgement have application to the directors of CAC entities, and FMA agencies where the Chief Executive is responsible for signing the agency’s financial statements.

In the light of this judgement, it would be prudent for all Audit Committees to review their own arrangements for reviewing an entity’s financial statements and the processes, including the timeframes involved, in providing advice to the Chief Executive/Board on the results of their review.

Audit Committee financial statement responsibilities

An Audit Committee’s responsibilities in relation to the entity’s financial statements would generally be to: review the financial statements and provide advice to the Chief Executive/Board, (including whether appropriate action has been taken in response to audit recommendations and adjustments) [12] and recommend signing of the statements by the Chief Executive/Chair of the Board [13]; satisfy itself on the adequacy of key internal controls and their operation, and that the financial statements are supported by appropriate management sign-off on the statements; and review the processes in place designed to ensure that financial information included in the entity’s annual report is consistent with the signed financial statements.

Part 3 includes a committee and management checklist in relation to the financial statements (pages 91 to 97).

 

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