How Do I Choose the Best External Auditor?

The audit committee is a special committee on the company's board of directors. Mainly responsible for the supervision of the company's financial statement disclosure and internal control process. In the company's board of directors, it performs functions of control and supervision on the company's information disclosure, accounting information quality, internal audit and external independent audit. ^[1]

The Audit Committee

The audit committee is a special committee on the company's board of directors. Mainly responsible for the supervision of the company's financial statement disclosure and internal control process. In the company's board of directors, it performs functions of control and supervision on the company's information disclosure, accounting information quality, internal audit and external independent audit. ^[1]

According to the definition of the Sarbanes-Oxley Act of the United States, the audit committee refers to a committee (or equivalent body) initiated by the board of directors of the issuing securities company and composed of board members, whose purpose is to supervise the company's accounting, financial reporting and company

The emergence and development of the concept of the audit committee can be seen as a reflection of several cases of fraud and company bankruptcy that have caused great public concern in the United States and Canada.

Since 1978,

The audit committee should form a board committee, which should have a written authority definition that clearly divides responsibilities. The formal establishment of the audit committee can ensure a clear relationship between it and the board of directors to which it is responsible. In particular, the scope of the right to perform business on behalf of the board of directors and the responsibilities of the committee should be clearly defined. The terms of reference should be formally approved by the board.

The work of the audit committee should be replayed to assist the board of directors in fulfilling their responsibilities related to the financial reporting process, as well as the major responsibilities of the company's internal control system. This can be considered in the following five main areas:

Since the meetings of the audit committee may be relatively few, they should be well organized and properly recorded. The secretary shall be responsible for arranging meetings, taking minutes and circulating documents.

Minutes of meetings should be circulated among members of the company's board of directors to keep the board informed of committee activities and recommendations. The audit committee should prepare at least one formal report to the board of directors each year, detailing the work done by the audit committee and the problems found during the year. Such a report should include:

1. A summary of the efficiency and effectiveness of the internal control system.

2. A summary of the effectiveness of internal audit functions and feedback on internal audit results.

3. Discuss with the external auditors a summary of their work and results in the interim and annual report audits and the management proposal.

4. Recommendations for the reappointment of external auditors, as well as all issues concerning resignation, replacement or dismissal of auditors.

I think what I have introduced above covers most of the composition, functions and reporting of the audit committee. Before I conclude, I want to make a brief and comprehensive evaluation of the audit committee, independent directors, and some of the progress that has occurred since their establishment. Because most listed companies in Hong Kong have audit committees, a formal group of "independent non-executive directors" has emerged in each company. In recent years, stock exchanges have increasingly preferred this group to perform additional functions and increase the work and responsibilities of these directors. Here are some of the most common examples:

1. When a listed company has a declarable transaction as defined by the stock exchange, the company usually sends a notice detailing the transaction to the shareholders, and this notice usually includes a letter from an independent board committee, usually A letter from an independent member of the audit committee, in which they would recommend shareholders to support the proposed transaction.

2. It is very close to the transaction mentioned above. When a company has a continuous day-to-day connected transaction with the holding company, it is not feasible to issue an announcement every time a related transaction occurs. In some cases, companies will usually apply to the stock exchange for an "exemption" from continuing announcements. Such exemptions are usually granted by the Stock Exchange under appropriate conditions, one of which is: "The company's independent non-executive director should review these transactions and prove that the execution of the transaction in the company's annual report and account is: a) In the ordinary course of business of the company; b) (the execution of the transaction is) on normal commercial terms or no better than the terms given or obtained from an independent third party c) (in the transaction) all terms involving the company's shareholders are Fair and reasonable above may sometimes be difficult for independent directors to prove themselves. In my experience, it is usually wise to get the help of external auditors who will understand these transactions and check these during their audit transaction.

3. From July 1, 2000, for all listed companies with an interim period on or after July 1, the Hong Kong Stock Exchange requires its audit committee to review the interim report. The announcement requires that if the company does not have an audit committee, the company's external auditors should review the report. The following is a very important description of this review: "It is the responsibility of the audit committee to determine the scope and extent of the review." It is important to emphasize that it is the responsibility of the audit committee to determine the scope and extent of the review, not the company or external audit. In practice, the audit committee usually hires external auditors to assist them to reduce their responsibilities, but how much work should be done is still up to the committee.

4. The recent increase in liability to independent directors was released by the Hong Kong Stock Exchange in August 2001. It is about granting stock options. This regulation, which came into effect on September 1, 2001, states that "Each time a share option is granted to a director, CEO, or substantial shareholder of a listed company or any related party, it must be independent Approved by non-executive directors "

You can see from the four examples above that the stock exchange has taken the roles of independent non-executive directors and audit committees very seriously and relied on them to fulfill many of the requirements they listed. This is an ongoing trend and we can expect more and more work and responsibilities to be added to these independent directors in the future. It is therefore important for the company to be careful when selecting its independent non-executive directors. Because their work will reflect the public's perception of company managers and corporate governance, these will in turn affect the performance of company stocks in the securities market.