An analysis of the development, status and functioning of audit committees at large listed companies in South Africa
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Accurate, credible and reliable financial reporting is critical for the effective functioning of the world’s capital markets and the protection of the interests of stakeholders, who rely on such information for their decision making. All the well- known corporate collapses of the 21st century have in common fraudulent financial reporting, unscrupulous management practices and the fact that they all had audit committees consisting of well-known and respected people. This state of events highlighted the fact that audit committees should not merely exist as window-dressing, but should be effective in their functioning. Audit committees will thus only be of value if they are properly constituted, are functioning effectively and if their role is clearly understood by all the parties concerned. This study’s research problem was to analyse the effective functioning of audit committees in the modern business environment, and the study aimed to investigate the factors and events that impact on the development, status and effective functioning of audit committees at large listed companies in South Africa. This was done through a comprehensive literature study of the factors impacting on audit committees and the empirical testing thereof at the largest listed companies in South Africa. The study found that audit committees are well established, properly constituted, have the authority and resources to effectively discharge their responsibilities and consist of members who act independently and who have the right mix of appropriate experience, financial literacy and financial expertise amongst their members. The audit committee’s role was found to be generally well understood and supported by the board and the Chief Financial Officers. It was further found that the audit committees are effective in discharging their oversight responsibilities on the board’s behalf, with the only real exception being their effectiveness regarding IT-related aspects. However, audit committee reporting in annual reports was found to be of a poor standard and did not reflect the iii actual workings and effectiveness of the committee. It was also found that the audit committee’s perceived responsibilities are evolving and that audit committee members’ legal liabilities are increasing. The research findings make a valuable contribution to the existing body of knowledge on current audit committee practices and developments. The study also outlines new responsibilities for future audit committees, as well as aspects that should be addressed in future legislation, regulations, corporate governance codes and best practice standards for audit committees.