Advantages and disadvantages of audit committees

An audit committee is a committee comprising of non-executive directors which is able to view a company’s affairs in a detached and independent way and collaborate effectively between the main board of directors and the external auditors.

Clearly, the functions of the audit committee are quite wide-reaching, therefore, it may be necessary to establish an internal audit function in order to help them fulfill their responsibilities.

• The company should have an audit committee of at least three non-executive directors (or, in the case of smaller companies, two).
• At least one member of the audit committee should have recent and relevant financial experience.

Advantages of audit committees: An audit committees have the following advantages:

• It may improve the quality of management accounting, as it is well placed to criticise internal functions.
• It should lead to better communication between the directors, external auditors and management.

Disadvantages of audit committees: An audit committees have the following disadvantages:

• fear that their purpose is to catch management out
• non-executive directors being overburdened with detail
• a ‘two-tier’ board of directors
• additional cost in terms, at least, of time involved.