Performance evaluation
Audit committees are accountable to the board and the shareholders, and two key elements of this accountability are the committee’s report on its activities and its assessment of its own effectiveness.
The audit committee's accountabilities are established by the legal framework under which the company operates and the requirements imposed by securities regulators. Most audit committee also have additional specific accountabilities (as the committee has defined them) described in its charter, and these often go beyond the bare imperatives. Indeed, audit committee effectiveness cannot be defined as mere compliance with regulatory requirements.
Therefore, the charter is the principal yardstick against which the committee should evaluate its effectiveness.
All audit committees should monitor their performance and assess their effectiveness on a regular basis. Moreover, in today's environment where shareholders' and regulators' expectations have grown significantly, and continue to do so, audit committees must also strive for continuous improvement. Monitoring performance and effectiveness is an exercise that requires strong leadership, discipline and diligence.
The responsibility for assessing audit committees effectiveness is a topic that is assuming more and more importance. In our opinion, the responsibility for assessing the committee's overall performance and effectiveness, together with a continuous improvement program, should reside with the audit committee. Additionally, we believe that the audit committee has a responsibility to report to the board of directors on its assessment of its performance and effectiveness.
The assessment of performance and effectiveness of the audit committee is best accomplished through a self-assessment process, and a subsequent report thereon to the board of directors. This should be done annually, or at least bi-annually.
The audit committee should review and assess:
- the appropriateness of its charter annually, and recommend to the board of directors any changes that the committee determines to be appropriate
- the performance of the committee based on compliance of the audit committee with its charter
- the performance of its members.
The board of directors also has responsibilities in this area. It must clearly enunciate in the board charter that it expects its committees to evaluate their effectiveness. The approach used by the board committees should, of course, be agreed among the board, the governance committee and the audit committee.
In assessing their performance, audit committees should address two fundamental questions:
- Is the committee satisfied that it has effectively discharged its responsibilities as set out in its charter?
- How can the committee improve its operating efficiency and effectiveness?
Audit committees should report to the shareholders on how they have discharged their responsibilities. By publishing their charter, audit committees report on the responsibilities they have assumed. In today’s environment, however, it may be appropriate for audit committees to go further and report on how they have discharged the responsibilities set out in the charter.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/cn/en/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.
