Why Form an Audit Committee?

Cooperatives March 08, 2011 Print Friendly and PDF


Authors: Phil Kenkel, Oklahoma State University, phil.kenkel@okstate.edu, and Bill Fitzwater,
Oklahoma State University


The Sarbanes Oxley Act of 2002 mandated that firms which issue publicly traded securities must have a formal audit committee. The act also included requirements for the composition and functioning of the audit committee. Although the Sarbanes Oxley Act does not apply to most cooperatives, this increased focus on the board’s role with respect to the audit has encouraged cooperatives to evaluate forming an audit committee or to re-evaluate how their current audit committee is functioning.


The basic advantages to forming an audit committee are:

  • It highlights the cooperative’s commitment to its trustee responsibilities.
  • It identifies and involves board members with financial competencies.
  • It provides a mechanism for year-around activities and oversight.


Who is the Audit Committee?

Generally, two to four members are picked from the cooperative board of directors. They should be chosen for their skills in financial accounting, auditing, risk assessment, security and internal controls. They should also be trustworthy and reliable.


The Entire Board as the Audit Committee

For some small cooperative boards, it may be more functional for the entire board of directors to serve as the audit committee. A small board (five to seven members) may find it is practical for the entire board to be involved in the audit functions. The disadvantage of this approach is that year-around audit responsibilities may be overshadowed by other issues. It is also important for the board/audit committee to distinguish between general board of director meetings and meetings to discuss audit-related activities. Preferably, meetings or portions of meetings dedicated to audit committee functions should have their own minutes and agenda. Otherwise, it will be difficult to document that audit functions were carried out.


Membership

Recent regulations on corporate governance specify that audit committee members should be independent, that is, they should not be receiving any consulting fees or be involved with corporate subsidiaries. These independence issues are generally not present in cooperatives. Any member of the cooperative board would generally be eligible to serve on the audit committee. Because of the increasing emphasis on the audit committee’s oversight of internal controls, many cooperatives are adding the financial manager or bookkeeper to the audit committee.

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.