Appointing the right members to a council’s audit committee allows for informed, effective oversight. Effective audit committees have members with the right mix of skills and experience who understand the risks facing the entity.
So, what is the right membership for an effective local government audit committee?
An independent audit committee, with a majority of independent, external members, is key to good corporate governance. These members must be free of any relationship that may reasonably be perceived to impair their ability to act in the entity’s best interest. Examples of relationships that may impair independence include:
- having previous employment with the council, where there has not been at least three years between the end of this employment and joining the committee
- acting as a professional advisor or consultant to the council
- being a supplier or customer of the council within the past three years
- being a former councillor of the council.
The above criteria are not exhaustive but give an idea of the types of relationships that may impair independence. Councils should consider individual circumstances prior to and during a member’s appointment to the audit committee.
Council audit committees should have a minimum of three members, including an independent chair. These members should bring a balance of skills, knowledge and experience in order to fulfil the committee’s role.
Councillors are local knowledge experts, and this knowledge is important to audit committees.
However, the committees need a majority of independent members who can bring a wide variety of experience and business acumen from different entities and industries. In small communities, it
is more likely that the best independent members will be from outside the region.
When appointing members to the audit committee, councils should ensure:
- at least one member has financial experience, meaning significant experience and skills in financial matters
- members have a mix of skills and experience in business, compliance, governance and risk management
- members are financially literate, meaning they can understand financial statements, ask relevant questions and interpret the answers provided
- members have a good knowledge information systems and emerging technologies
- members understand the local government environment, the entity, and its business, and can understand and challenge management’s decisions and their impact on the entity.
Benefits of having the right mix
There are several benefits to an entity having the right mix of members on an audit committee. The main benefit is that it supports strong corporate governance, which in turn promotes confidence and trust in the local government from stakeholders.
Other benefits include:
- promoting sustainability—good governance allows entities to identify and resolve matters to safeguard their reputation and future
- encouraging positive behaviours—setting the tone at the top with an appropriate audit committee will promote the entity’s values throughout the organisation
- minimising fraud risks and mismanagement—increased levels of transparency and accountability within an entity reduces risks of mismanagement
- providing possible economic benefits—good governance may help management to identify potential opportunities or areas for improvement in the business
- acting as a forum for dialogue—between councillors, management, and auditors.
Other considerations when appointing audit committee members
- Aligning the skills of members with future plans—the skill sets of the committee members should meet the needs of the council and its future plans. For example, if it is planning to undertake a significant information system upgrade, the council should consider appointing an audit committee member with relevant information technology knowledge.
- Accessing the right skills—with technology advancements, audit committee members do not have to be physically present at the meetings; they can attend through an electronic medium. This widens the pool of potential audit committee members with diverse skills and knowledge who could be valuable to the future of the community.
- Inducting and training—new members need to understand the committee's charter, including its role, objectives, and responsibilities, as well as how it interacts with management and auditors. They also need to know about the council’s code of conduct, its operations, and the environment in which it functions.
- Managing conflicts of interest—this is particularly relevant where the council appoints local independent members, as their membership may provide them with a competitive advantage over other businesses in the community. Members of the audit committee should always maintain ethical standards in the discharge of their duties and responsibilities, and exercise honesty, objectivity, and integrity.
Where can I find further information or advice
- The importance of culture
- The role of audit committees in financial reporting
- You have an audit committee, but is it effective?
Reports to parliament
- Local government entities: 2018–19 results of financial audits (Report 13: 2019–20)
- Local government entities: 2015–16 results of financial audits (Report 13: 2016–17)
We are currently undertaking an audit on the effectiveness of audit committees in state government entities, which is due to table in 2020–21, and are planning an audit on local government audit committees in 2021–22.
Other reference material
- Audit Committee Guidelines: Improving Accountability and Performance (Queensland Treasury)
- Audit Committees: A Guide to Good Practice 3rd edition (A joint publication from the Auditing and Assurance Standards Board, Australian Institute of Company Directors and The Institute of Internal Auditors-Australia)