CGF ARTICLES, OPINIONS & EDITORIALS
Positioning the Audit Committee on the frontline (2014-02-10)
February 20,
2015 3843 3843 
Article by CGF Research, written by written by Melanie Bosman CA (SA)
Undoubtedly, the Audit Committee has become the most important statutory committee in an organisation, and arguably, many boards of directors may not have fully appreciated its function, nor its powers, including the importance it duly deserves.
The Companies Act ’08 and the requirements of the King Report on Governance for South Africa (‘King III’) place onerous responsibilities on the Audit Committee. The role and responsibilities placed upon its members have become so wide that to call it an Audit Committee almost doesn’t seem appropriate any more. Audit Committees were originally introduced mainly to deal with the company’s external and internal audits. Gradually, risk management was added and many committees became Audit and Risk Committees. Increasingly, evidence now also shows that a number of companies are beginning to incorporate the Social & Ethics Committee into the Audit Committee. All these developments compound the role of the Audit Committee, whilst it also calls for its members to be far broader in their knowledge and experience in order to deal with the myriad of issues placed before them. As the regulators -- specifically within the financial services companies -- continue to add more regulatory responsibilities through legislation, expectedly the liability attached to the Audit Committee and its members increases significantly, both jointly and severally.
Now Audit Committees face a new, and possibly their biggest challenge in the form of their role and sign-off for the integrity of the Integrated Report (‘IR’). And whilst the Integrated Report is -- for now -- mostly a requirement for listed and state-owned companies; smaller private companies may soon also be expected to address the manner in which they report on their financial and non-financial matters (as is the case with their larger counterparts).
Integrated Reporting
Integrated Reporting is still in its infancy, with the International Integrated Reporting Council releasing the Integrated Reporting Framework (‘IR Framework’) in December 2013. Alongside that, the Global Reporting Initiative issued the G4 Sustainability Reporting Guidelines (‘G4 Guidelines’) earlier in 2013. The principle behind Integrated Reporting is that an organisation should report on past, present and future activities, as well as provide the financial and non-financial performances and trends within the organisation. The concept of ‘capitals’ is introduced and it’s defined as the resources and relationships used and affected by an organisation. The capitals are categorised as financial, manufactured, intellectual, human, social and relationship, and natural.
The aim of Integrated Reporting is to provide any stakeholder a true understanding of how an organisation creates value over time. Most organisations already understand that their value is much more than the net asset value reflected in the annual financial statements. Through Integrated Reporting an organisation will now report on the other drivers of value in its business, for example IT systems, its people and customer relationships. At the same time, a balanced view should be given and the risk of ‘value destroyers’, for example IT security breaches or skills shortages, and how the organisation mitigates these risks. All these types of issues are expected to be sufficiently reported on.
