THE EU's new eighth company law directive came into force on June 29 this year. The Slovak government will have two years to adopt this directive and include it in Slovak law. In particular, Article 39 requires that listed companies have an audit committee. Companies that are not listed on a stock market will not need to have an audit committee, but it is generally considered to be best practice. This is a relatively new concept in Slovakia and managers should start thinking about how this will affect them.
What exactly do audit committees do? How are they different from existing supervisory boards? The answers to these questions are not widely known even in countries that already make use of audit committees.
These committees can do a variety of things, so it is important that they know exactly what is expected of them. Here are just some of the things that audit committees do:
- they can act as independent supervisors of the management board to ensure that they are using investors' funds appropriately, especially given the past history of "tunneling" or asset stripping in Slovakia;
- they can act as a bridge between management and shareholders;
- they can review the company's financial statements and ensure that the statements show what the committee members believe is the real situation in the company;
- they can ensure high quality financial reporting (although this is the responsibility of the management board, sometimes there is pressure on the management to manipulate financial statements);
- they can oversee the relationship between external auditors and internal auditors to ensure that they cooperate;
- they can review auditors' management letters which identify the weaknesses found in the company's control systems and make recommendations about how to improve the business, and therefore encourage the management board to implement improvements;
- they can review the adequacy of the control system in the company;
- they can review the process for monitoring compliance with laws and regulations;
- they can review the effectiveness and value for money of the external auditors;
- and they can ease pressure on busy managers by dealing with audit issues rather than leaving them to the management board.
All of these roles are good for business. Corporate shareholders and management and supervisory boards need to talk to each other to ensure that such committees can really help reduce the risk of financial reporting errors. For example, given that many Slovaks are now depositing some of their earnings in private pension funds to provide them with security in the long term, it is in all our interest that someone is watching over the financial statements that fund managers are using to invest our money.
Many Slovak companies have a supervisory board whose job it is to supervise the decisions and work of the management board. However, many finance professionals in Slovakia believe that supervisory boards are not effective. EU legislators have considered whether a lack of independent and effective supervision could have contributed to the financial scandals of the past five years around the world. The result of their debate is this new law, which requires the audit committee to be made up of independent non-executive (supervisory) directors, at least one of whom must have accounting or auditing experience.
The obvious question that arises is where Slovak companies will find qualified accountants and auditors who understand international standards on auditing (ISA) and international financial reporting standards (IFRS) to play this role. A quick check of the profesia.sk job site shows that demand for financial professionals outstrips supply. The accountants and auditors that now exist in Slovakia will probably not have enough time to act as part-time audit committee members on top of their existing work loads.
Furthermore, how will companies find people who are independent? Independence is not very clearly defined in the new law, but at a minimum it means a person with whom a company does not have an existing close relationship.
The author is a tutor with BPP International professional training centre in Bratislava.
25. Sep 2006 at 0:00 | Rosauro Aala