What Does an Audit Committee Actually Do?

By Adrian Lawrence FCA, founder of NED Capital · Part of the NED Capital Insights

The audit committee is one of the most important committees of any board, and one of the least understood outside the boardroom. Its work is often described in the language of compliance — financial reporting, internal controls, external audit — which makes it sound narrower and drier than it is. In practice the audit committee exists to give the board, and through it the shareholders, independent assurance that the numbers can be trusted and the risks are being managed. This article explains, in plain terms, what an audit committee does, why it matters, and what makes an effective one.

The Committee’s Core Purpose

At its heart, the audit committee exists to provide assurance on the things the full board cannot easily verify for itself. Boards make decisions on the basis of financial information prepared by management; the audit committee’s job is to give the board confidence that the information is reliable, that the controls producing it are sound, and that the risks facing the business are properly identified and managed. It is a committee of non-executive directors precisely so that this assurance is independent of the management whose work it is scrutinising. That independence is the whole point: the committee is the board’s check on the integrity of what it is being told.

What the Audit Committee Oversees

The committee’s responsibilities cluster around four areas. First, the integrity of financial reporting — reviewing the annual accounts and the significant judgements and estimates within them, and satisfying itself that the financial statements give a true and fair view. Second, internal controls and risk management — monitoring whether the systems that safeguard the company’s assets and produce its financial information are effective, and whether risks are being managed within the board’s appetite. Third, the external audit — overseeing the appointment, independence, effectiveness and fees of the external auditor, and being the auditor’s point of contact independent of management. And fourth, internal audit and whistleblowing — where these exist, ensuring they are effective and that concerns can be raised and investigated properly.

The Role of the Audit Committee Chair

The chair of the audit committee leads all of this, and it is a demanding role that requires genuine financial expertise. Under the UK Corporate Governance Code, the committee must include at least one member with recent and relevant financial experience, and in practice the chair is expected to embody it — someone who can read and interrogate financial statements fluently, understand the accounting judgements behind them, and challenge both management and the auditor from a position of real knowledge. It is also a role with heightened exposure: if reporting proves misleading or controls fail, the audit committee chair’s stewardship will be examined closely. For that reason it is one of the board appointments where financial credibility matters most, which we cover on our audit committee chair recruitment page.

Why the Audit Committee Matters

The importance of the audit committee becomes clearest when it fails. Many of the most damaging corporate collapses and scandals have involved, at their core, a breakdown in the assurance the audit committee is meant to provide — financial statements that misled, controls that did not work, risks that were not surfaced, auditors who were not truly independent. A strong audit committee is the board’s early-warning system and its guarantee of financial integrity; a weak one leaves the board dependent on management’s own account of how the business is performing. For investors, regulators and the wider public, the credibility of a company’s financial reporting rests heavily on the quality of its audit committee.

What Makes an Effective Audit Committee

An effective audit committee combines the right expertise with the right behaviour. It needs financial literacy across its membership and real depth in its chair; genuine independence from management; and the willingness to ask hard questions and pursue unsatisfactory answers rather than accept reassurance. It needs enough time and information to do its work properly, and a constructive but sceptical relationship with both the finance team and the external auditor. Above all it needs the culture of challenge that distinguishes assurance from rubber-stamping. The behaviours that underpin this are the same ones that make any non-executive effective, set out in our overview of NED skills, competencies and behaviours.

NED Capital | Sister practice of FD Capital | ICAEW practising certificate held by Adrian Lawrence FCA.