University of lbadan Law Journal 
Audit Committee in Corporate Governance 
Olayiwola o. Oladele* 
Introduction 
There is an increasing effort globally to combat fraud and 
malpractices in companies so as to make corporate dealings trust- 
worthy. The effort calls for ensuring the integrity of companies' 
financial statements, compliance with accounting standards and 
legal requirements as well as institutionalizing of qualitative and 
effective internal control and risk management policies. To achieve 
all of these, law and policy in leading and emerging markets 
require every public company to intermediate the relationship 
between the auditors and management of audited companies by 
setting up an audit committee or its equivalent with clearly defined 
facilitative functions. 
This article evaluates the conceptual basis for composition, 
duties, rights and ethics of audit committees to determine the 
latter's suitability to contemporary and emerging challenges, 
considering that auditing is a professional engagement with legal 
and professional ethics implication. It does so with a view to 
recommending a framework that will not make the committees exit 
merely as another layer of ineffective bureaucracy. From a 
transatlantic to global survey, it rests on the Nigerian situation. 
In Nigeria the present appraisal finds a contemporarily weak as 
well as purposed to achieve independence and balance of power 
audit committee. That committee is recyclable yearly through a 
democratic system that is prone to making subjective and wrong 
choices in the absence of comprehensive regulatory guidelines. 
That committee has an open-ended mandate, and is required to 
serve gratuitously, subject to no liability for shirking. It is 
submitted that the committee, as presently constituted and manda- 
ted, is unsuitable to the emerging functions of audit committees. 
In the light of this finding, this article submits a way out of the 
current global corporate failures arising from unethical and totally 
criminal financial statements manipulation as well as weak internal 
* (LL.B (Hons.); LL.M (lfe); LLM (Georgetown); M.Div.(Th.) (N.B.T.S.); PhD 
(lfe); Barrister of the Supreme Court of Nigeria). Professor of Business Law and 
Provost, College of Law, lJetedo Campus, Osun State University, Nigeria. 
ooladele@uniosun.edu.ng 

Audit Committee in Corporate Governance 
controls over regulatory compliance. That path begins with a 
paradigm shift in the need for composition, role, duties, rights and 
liability of audit committees. 
The Conceptual Basis of Audit Committee 
The audit committee is a specialized standing committee in 
corporate governance that emerged before the corporate failures of 
the past decade and contemporary time. The committee is purposed 
to assist in ensuring "that the members of the Board of Directors 
satisfy their duties of care with respect to the adequacy of the 
company's financial processes."] To that purpose and intent, the 
committee monitors and superintends the preparation of the 
company's financial statements by appraising the information that 
it has unlimited power to obtain from the company's management, 
departments and independent auditors. It also has enormous 
responsibility for the internal controls system of the company. 
The initial conceptualization and establishment of the audit 
committee were in the light of the fact that financial statement 
preparation and reporting are expert engagements delegated by the 
company to the company's finance staff. For the auditing of its 
financial statements and the appraisal of its financial reporting and 
internal control processes, the company engages independent 
internal and external auditors.i To ensure the independence of the 
auditors that perform the latter function, certain persons are 
disqualified from being auditors of the company. They are an 
officer (excluding the auditor) or servant of the company, a person 
who is a partner of or in the employment of an officer or servant of 
the companY', and a body corporate (not being of professional 
auditorsj.:' 
Ironically, against the background of the role of the audit 
committee above, the Companies and Allied Matters Act (CAMA) 
devotes only four sub-sections (section 359(3)-(6)) to the objecti- 
ves, establishment, composition, functions and powers of the 
committee. In an indeterminable way, it adds that a company's 
I Fenwick & West LLP, Corporate Law & Securities Update: Audit Committee 
Duties and "Best Practices", March 21, 2002, p.2. 
2 See the Companies and Allied Matters Act (CAMA), Cap C20, Laws of the 
Federation of Nigeria 2004, sections 357-367. 
3 S. 358, id. 
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University of lbadan Law Journal 
articles of association may stipulate additional functions and 
powers of the committee. The CAMA has no provisions on the 
qualifications and liability of the committee. To drive home the 
seeming lack of importance attached to the committee, the CAMA 
allows the general meeting of the company to elect as 
shareholders' representatives on the committee any of the members 
nominated by any member, without prescribing any minimum 
qualification and competence. It is only the persuasive Code of 
Good Governance for Public Companies in Nigeria, which has no 
statutory efficacy, that requires that members of the audit 
committee should be able to read and understand basic financial 
statements so as to be able to make valuable contributions in the 
decision-making process of the committee. 
It is significant that the paradigm for establishing and 
measuring the effectiveness of audit committee is changing in the 
light of the accounting and auditing frauds of the past decade that 
caused massive corporate failures globally, beginning in the United 
States, extending to Europe and impacting the Nigerian financial 
sector negatively in the past few years. A World Bank survey 
reputes the United States to have the best financial reporting and 
corporate governance systems in the world. These systems thrive 
on the adoption of best practices by public companies within the 
existing legal and regulatory framework." However, in spite of the 
success of the systems, accounting fraud and self-dealing by 
corporate insiders have occurred. This led to the collapse of Enron, 
Arthur Anderson, Tyco, ImClone, WorldCom" and Adelphia and 
caused investors untold losses. It also raises much apprehension of 
systemic failure, and serves as a warning to major and emerging 
markets for a rethink of their financial regulations. It is significant 
that the resultant financial disaster affected the shareholders, 
creditors and employees of the companies more than the directors, 
and gives fresh urgency to the issue of trust in corporate 
governance, financial reporting and internal controls.i 
4 See Kwakwa, Victoria and Nzekwu, Greg., "International best practices on 
corporate governance" in Alo, Oladimeji (ed.) Corporate Governance, Lagos, 
Financial Institutions Training Centre, 2003, p.30. 
5 See Robinson, Irwin, Jay "Guidelines and cautions for persons serving as 
directors of corporations - public or private" (2002) 30 International Business 
Lawyer, 339. 
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Audit Committee in Corporate Governance 
The United States responded promptly to the threat when 
Congress enacted the Sarbanes-Oxley Act, officially titled "Public 
Company Accounting Reform and Investor Protection Act of 
2002.,,6 The Sarbanes-Oxley Act, which is meant to enhance the 
accuracy and reliability of corporate disclosures, covers issues 
such as auditors' independence and their oversight, corporate 
responsibility, and enhanced financial disclosure. In the United 
States the Act is " ... the most important piece of legislation 
affecting corporate governance, financial disclosure, and the 
practice of public accounting since the United States securities 
laws of the early 1930s.,,7 In its effort to restore investor's 
confidence, it also enhances the role of audit committees and 
charges the management with more responsibilities for corporate 
disclosures and financial statements. The Act has substantially 
enacted what were initially proposed as changes to the securities 
market listing standards, best practices and rulemaking by the 
American Securities and Exchange Commission (SEC).8 
The provisions of the Sarbanes-Oxley Act are, among other 
things, to 

(a) 
(b) 

strengthen the independence of auditing firms by 
•	establishing a new regulatory body to oversee public 
company auditors; 
•	redefining the relationship between auditors and their 
clients; and 
•	placing direct responsibility for' the audit relationship 
on audit committees; 
improve corporate disclosure by 
•	establishing new disclosure requirements for issuers of 
securities; and 
•	accelerating reporting deadlines; 

6 Public Law 107 - 204, 116 Stat. 745. 
7 IBM, Innovations in corporate responsibility 2004-2005, at p,9, also available 
at WWW.IBM.COMIIBMIRESPONSIBILlTY. 
8 See generally, Huber, John J. et at "The new disclosure and corporate 
governance regime: What every corporate and securities lawyer must know 
now," 1335PLIICorp517 (October 2002), p.2. 
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University of lbadan Law Journal 
(c) increase the responsibility of management by 
•	requiring certification of periodic reports by Chief 
Executive Officers (CEOs) and Chief Financial Officers 
(CFOs); 
•	holding the CEO and CFO responsible for mis- 
statements due to misconduct; 
•	imposing new obligations and responsibilities on audit 
committees; 
•	banning most loans to officers and directors; and 
•	increasing a variety of criminal penalties and enforce- 
ment measures for securities-related offences; 
(d) improve the objectivity of research by 
•	addressing conflicts of interest which securities 
analysts may have with investment banking function of 
broker/dealers; and 
(e) regulate the conduct of securities lawyers by 
•	requiring minimum standards of professional conduct 
for lawyers appearing or practicing before the SEC.9 
Empirical evidence shows that Europeans could not envision a 
falsification of accounting records of such a devastating dimension 
as those of the United States until December 19, 2003 when 
massive accounting fraud led to the collapse of Parmalat, a giant 
Italian dairy and food company in Europe whicfi replicated an 
Enron-like corporate scandal and accounting fraud of the United 
States. Among other things, Parmalat had understated its debts by 
approximately 12.5 billion Euros, overstated its earnings by five 
times, and gave false appearance of its sales by 35% on its 
financial statements.l" The response of regulators in the European 
Union (EU) "has led to a package of targeted measures, a few of 
9 Ibid. 
10 Eric Sylvers, "Parmalat Audit Finds Debts of 14.3 Billion Euros", INT'L 
HERALD TRIBUNE, Jan. 27,2004, at 11. For more on accounting frauds in the 
US and EU, see Clyde Stoltenberg, et. al., "A Comparative Analysis of Post- 
Sarbanes-Oxley Corporate Governance Developments in the US and European 
Union: The impact of Tensions Created by Extraterritorial Application of 
Section 404" 53 Am. J. Compo L. (2005). 
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Audit Committee in Corporate Governance 
them requmng legislation, ensuring that [EU has] ... " very high 
standards of financial reporting and corporate governance 
generally as well as a system of independent audit. I I 
In the face of ill-preparedness of the Nigerian regulatory 
system, her financial sector suffered a devastating blow to the 
stake of the corporate shareholders and other stakeholders when 
some leading banks failed in the past few years-due to corporate 
maladministration. Ironically, those banks not only had pro- 
fessional auditing personnel but audit committees that ought to 
have ensured sound internal controls. There could be no better 
testimonial of a simplistically bureaucratic audit committee system 
than the global systemic failures that we have experienced. Even in 
dynamic legal and financial systems, ingenious manipulations arise 
that challenge the status quo without isolating the audit committee 
system. 
The enlightened but still contemporarily relevant view of 
Fenwick and West LLP offers the appropriate roadmap for 
responsively suitable action as follows: 
As with corporate governance in general, the audit 
committee's role has come under scrutiny in recent 
years. In response, both the minimum qualification 
requirements for audit committee membership and the 
required public disclosure about audit committee 
processes have increased. In the light of Enron and 
similar situations, scrutiny of audit committee perform- 
ance is likely to increase, so it is more important than 
ever to ensure that audit committees are satisfying at 
least the basic standards of conduct. 12 
Nigeria and other financial systems must heed the wake-up call 
above to ensure the soundness and integrity of their financial 
reporting and internal control systems. 
II Lord Sainsbury, Government Minister, speaking in the debate on the 
Companies (Audit, Investigations and Community Enterprise) Bill in the UK 
House of Lords (Jan. 8,2004) at co!. 259, available at 
http://www.europa.eu.int.lcomm/internaCmarket.lsmnlsmn33_en.htm 
12 Fenwick & West LLP, Corporate Law & Securities Update: Audit Committee 
Duties and "Best Practices", March 21,2002, p. 2. 
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University of lbadan Law Journal 
Global Trends in the Composition and Role of Audit 
Committee in Corporate Governance 
In many jurisdictions round the globe, the existence of an audit 
committee is either a mandatory or an optional corporate 
governance requirement. In Australia, Canada, Germany, Hong 
Kong, India, Italy, Japan, Mexico, The Netherlands, Spain, 
Thailand, Turkey, Portugal and the United States, every listed 
company must have an audit committee (corporate auditors in 
Japan, and committee for financial matters in the two-tier board 
structure of Portugal). In Brazil, France, Switzerland and the 
United Kingdom the establishment of audit committee is an 
	. I 	. 13 
option a corporate governance practice. 
In Nigeria, the establishment of an audit committee for every 
public company is a statutory requirement of the CAMA.14 The 
Act requires the auditors of a public company to make a report to 
the audit committee of the company on the accounts, balance sheet, 
and other financial statements that they have examined. 15 The audit 
committee must consist of equal number of directors and 
representatives of the shareholders. In addition to its specific duties 
under the CAMA and functions that the company's articles of 
association may specify, the committee must examine the auditor's 
report and make recommendations on it to the annual general 
meeting as it deems it fit.16 The members of the committee are not 
entitled to remuneration and may be re-elected annually by the 
general meeting. 17 The gratuitous nature of the engagement of the 
committee members appears to be purposed at getting on the 
committee only corporate insiders that are keenly interested in the 
affairs of the company. The members are in practice entitled to 
seating allowance for the committee's meetings. 
13 Technical Committee of the International Organization of Securities 
Commissions (lOSCO), Board Independence oj Listed Companies Final Report, 
March 2007, (lOSCO TC Final Report, 2007), p.43, available at 
http://www.IOSCO.orgllibrary/pubdocs/pdjlioscopD238.pdjvisited on 15/05/07 
14 Cap C20, Laws of the Federation of Nigeria 2004. 
15 Id., s.359(3) 
161d. 
17 Proviso to section 359(4), CAMA. 
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Audit Committee in Corporate Governance 
The Composition of Audit Committee 
The Organization for Economic Cooperation and Development 
(OECD) in its Principle VLE.l of the Principles of Corporate 
Governance recommends that every public company should assign 
a sufficient number of non-executive directors capable of exerci- 
sing independent judgment in corporate affairs to tasks such as 
ensuring the integrity of financial and non-financial information. 
Similarly, the International Organization of Securities Commission 
(lOSCO) issued in 2002 a set of principles on the independence of 
auditors and the role of corporate governance in monitoring it. In 
coalescence, these principles recommend the existence in every 
public company of an audit committee or an independent corporate 
body equivalent to the committee. 18 
In the jurisdictions that make up the OECD and in Nigeria, 
there is a consensus, even a statutory stipulation in some, that an 
audit committee needs a significant membership of independent 
board members for it to be effective. In countries including 
Australia, Hong Kong, Japan, Portugal, Spain, Switzerland and 
Turkey, it is recommended that independent board members (non- 
executive board-members in Spain) be at least one half of the 
committee members, two thirds in France and India, and the entire 
committee in Brazil, Canada, Mexico, Italy, Thailand, the UK and 
the US.19 
Australia, Canada, Hong Kong, Italy, Mexico, Spain, 
Switzerland, Thailand, Turkey, the United Kingdom and the 
United States recommend or require that an independent board 
member chair the audit committee. Many jurisdictions (including 
Turkey and Germany) recommend or require (e.g. Hong Kong) 
that all or some of the members of the committee have a measure 
f
	f . 11' 	20 
•	mancia iteracy. 
Clause 12 of the Code of Corporate Governance for Public 
Companies in Nigeria requires every public company to establish 
an audit committee in accordance with section 359 of the 
18 Technical Committee of the International Organization of Securities 
Commissions (IOSCO), Board Independence oj Listed Companies Final Report, 
March 2007, (IOSCO TC Final Report, 2007), p.43, available at 
http://www.IOSCO.org/library/pubdocs/pdjlioscopD238.pdJvisited on 15/05/07. 
19 Id. at 44. 
2°Id. 
208 

University of Ibadan Law Journal 
CAMA.21 The Code of Corporate Governance recommends not 
more than one executive director and a majority of non-executive 
directors as representatives of the board of directors on the audit 
committee. The non-executive directors should be independent of 
management and free from business or other relationships with the 
company. The rationale is that such a relationship could materially 
inhibit their unbiased appraisal of the affairs and policies of the 
company. A non-executive director should chair the audit 
committee, and its secretary should be the company secretary, its 
auditor or such other person that the committee has nominated. 
The CAMA provides that "[t]he ... committee ... shall consist of 
an equal number of directors and representatives of the share- 
holders of the company (subject to a maximum of six membersj.i'' 
Any member of the company "may nominate a shareholder as a 
member of the audit committee by giving notice in writing of such 
nomination to the secretary of the com:Bany at least twenty-one 
days before the annual general meeting." 
The way many public companies in Nigeria have constituted 
their audit committees, there is not much doubt as to the 
competence of the directors that are members.i" This is born out of 
the fact that the CAMA expects directors to have skills that are 
relevant to duties and to give due care to the business of their 
company. In addition, the same standard of skill, care and 
diligence is required of executive and non-executive directors. 
Consequently a good number of director-members of audit 
committees apply relevant skills to the committee's business. 
Conversely however, the field interviews that the author 
conducted revealed that a substantial number of shareholders' 
representatives on the audit committee have no requisite skill. 
They were nominated by fellow members of the company and 
elected or re-elected based on their influence and popularity at the 
annual general meeting through a democratic system that, more 
often than not, does not produce the most suitable representatives. 
Thus, the aim of having an independent committee that is so versed 
21 Cap C20, Laws of the Federation of Nigeria 2004. 
22 Id., s. 359(4). 
23 Id., s. 359(5). 
24 Information gathered from anonymous sources in the legal departments of 
some publicly quoted companies in the course of field interview that the author 
conducted in September, 2011. 
209 

Audit Committee in Corporate Governance 
in the affairs of the company so as to provide an effective internal 
control system is defeated to that extent that half of its membership 
is ill-equipped for its functions and powers. In that shape, the 
committee is unlikely to be able to ensure the compliance of the 
accounting and reporting policies of its company with legal 
requirements and ethical standard. It is also unlikely that the 
committee will ensure the integrity and effectiveness of the 
company's financial reporting and system of internal controls. 
The Functions of Audit Committee 
A survey of the specific functions of the audit committee from 
jurisdiction to jurisdiction shows a diversity of conterits. However, 
the Technical Committee of IOSCO has found that the common 
functions are 
•	Ensuring the integrity of the company's financial state- 
ments: To do this, the audit committee should playa very 
active role in monitoring and analyzing the financial 
information provided by management and check com- 
pliance with legal provisions and the correct application of 
accounting principles; 
•	Meeting on a regular basis with the internal and external 
auditors to discuss the financial information: The audit 
committee should be in a position to evaluate the external 
auditor's qualifications, performance and independence. 
The audit committee should review with the external 
auditor the problems that could arise or have arisen in 
auditing the financial statements. Concerning the internal 
auditor (if any), the audit committee supervises the quality 
of the internal procedures developed by the company; 
•	Ensuring the effectiveness of the internal control and risk 
management policy; 
•	Reporting on a regular basis to the board on all the 
relevant questions under its responsibility, including 
making recommendations on the appointment of the 
external auditor, its remuneration and the terms of its 
contract; and 
•	Monitoring related-party transactions.f 
25 ld. at 44. 
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University of lbadan Law Journal 
The Blue Ribbon Committee on Improving the Effectiveness of 
Corporate Audit Committees, in its 1999 report, summarized the 
responsibility of an audit committee as follows: 
In its oversight capacity, the audit committee is neither 
intended nor equipped to guarantee with certainty to 
the full Board and shareholders the accuracy and 
quality of a company's financial statements and 
accounting practices. Proper financial reporting, 
accounting, and audit functions are collaborative 
efforts conducted by full-time professionals dedicated 
to these purposes. The audit committee, as the first 
among equals, oversees the work of the other actors in 
the financial reporting process-management, including 
the internal auditor, and the outside auditors, to 
endorse the processes and safeguards employed by 
each. In particular, the audit committee should 
encourage procedures that promote accountability 
among these players, ensuring that management 
properly develops and adheres to a sound system of 
internal control, that the internal auditor objectively 
assesses management's accounting practices and 
internal controls, and that the outside auditors, 
through their own review, assess management and the 
internal auditor's practices." 
This article submits that every member of the committee requires 
regulated financial literacy or competence to discharge the func- 
tions above in a way that justifies the committee's relevance. 
Musa Al-Faki, one time Director-General of the Nigerian 
Securities and Exchange Commission (SEC) posits that the 
objectives of an audit committee include 
•	Increasing public confidence in the credibility and 
objectivity of published financial information; 
•	Assisting the directors especially (non-executive directors) 
in meeting the responsibilities of financial reporting; and 
26 Quoted with approval in Fenwick & West LLP, Corporate Law & Securities 
Update: Audit Committee Duties and "Best Practices", March 21,2002. 
211 

Audit Committee in Corporate Governance 
•	Strengthening the independent position of the company's 
external auditors by providing an additional channel of 
communication.27 
In the United States, the Institute of Internal Auditors, in a 
highly instructive publication, states that audit committee 
responsibilities include 
•	Ensuring that financial statements are understandable, 
transparent, and reliable; 
•	Ensuring that the risk management process is com- 
prehensive and ongoing, rather than partial and periodic; 
•	Helping achieve an organization-wide commitment to 
strong and effective controls, emanating from the tone at 
the top; 
•	Reviewing corporate policies relating to compliance with 
laws and regulations, ethics, conflicts of interest, and the 
investigation of misconduct and fraud; 
•	Reviewing current and pending corporate-governance- 
related litigation or regulatory proceedings to which the 
organization is party; 
•	Continually communicating with senior management 
regarding status, progress, and new developments, as well 
as problematic areas; 
•	Ensuring internal audit access to the audit committee, to 
encourage communication beyond scheduled committee 
meetings; 
• • Reviewing internal audit plans, reports, and significant 
findings; and 
•	Establishing a direct reporting relationship with the 
external auditors.zs 
The Institute emphasizes the fact that the management, board 
of directors, and audit committee must symbiotically set the tone 
for good corporate governance at the top by ensuring 
27 Musa Al-Faki, "Transparency and Corporate Governance for Capital Market 
Development in Africa: The Nigerian Case Study (2006) Securities Market 
Journal, 9 at 21. 
28 The Institute of Internal Auditors, "The Audit Committee Purpose, Process 
and Professionalism," available at www.theiia.org last visited on 16110/2010. 
212 

University of lbadan Law Journal 
•	Compliance with laws and regulations; 
•	Financial reporting of significant issues; 
•	Management monitoring of programme effectiveness; 
•	Staying informed and recognizing trends to ensure appro- 
priate action; 
•	Internal audit includes assessment of compliance and 
ethics risks in their audit plan; and 
•	Audit committee meetings with programme managers to 
discuss key risks, status, issues, investigations, disciplinary 
action and effectiveness?9 
It is important for the audit committee to ensure that the 
company has developed and keeps updated a code of conduct, and 
that all employees receive as well as understand it. The committee 
must also ensure that management behaves ethically, and all cases 
of overreaching are penalized.i'' 
The Institute of Internal Auditors adds that the key issues that 
should engage audit committee and dominate its communications 
with management are 
•	Financial Accuracy 	completeness of financial 
disclosures, significant changes in business and accounting 
policy, candor of reporting (truth and accuracy), and 
interim reviews of financial statements; 
•	Risk Management; 
•	Control Assessment - to apprise the audit committee of the 
process for evaluating internal controls and give the 
committee firsthand involvement in internal controls; 
•	External Auditor Oversight - Audit committee to maintain 
a relationship with external auditors; 
•	Effective Use of Internal Auditing - Internal auditors and 
the audit committee are interdependent and should be 
mutually accessible; with the internal auditors providing 
objective opinions, information, support and education to 
the audit committee; and the audit committee providing 
validation and oversight to the internal auditors; 
•	An in-depth understanding of internal audit best practices 
and how internal audit functions.i' 
29 The Institute of Internal Auditors, supra. 
30Id. 
31Id. 
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Audit Committee in Corporate Governance 
In Nigeria, every public company should define the terms of its 
audit committee by reference to section 359(6) of the CAMA. In 
addition to the functions, and powers of the audit committee under 
the company's articles of association, that subsection states that the 
functions of the committee are to 
(a) ascertain whether the accounting, and reporting policies of 
the company are in accordance with legal requirements 
and agreed ethical practices; 
(b) review the scope and planning of audit requirements; 
(c) review the findings on management matters in conjunction 
with the external auditor and departmental responses 
thereon; 
(d) keep under review the effectiveness of the company's 
system of accounting and internal control; 
(e) make recommendations to the board [of directors] 111 
regard to the appointment, removal and remuneration of 
the external auditors of the company; and 
(f) authorise the internal auditor to carry out investigations 
into any activities of the company which may be of 
interest or concern to the committee. 
In achieving its terms of reference, the committee should 
ensure a productive dialogue between the external auditors and the 
board. It should also ensure the credibility of financial disclosures 
and protect the interest of the shareholders of the company.Y 
Qualifications of Audit Committee Members 
Independence 
All jurisdictions with audit committees agree that they must have a 
number of independent directors as members. In the United States, 
the following directors are not independent and cannot serve on the 
audit committee: 
•	Current employees of the company or its affiliates; 
•	Individuals who have been employees of the company or 
its affiliates in any of the prior three fiscal years; 
•	Immediate family members of a person currently 
employed as an executive officer of the company or its 
32 The Code, clause 14(b). 
214 

University of Ibadan Law Journal 
affiliates or who has been employed III such capacity 
within the past three fiscal years; 
•	Directors who have had certain prohibited business 
relationships with the company in the prior three fiscal 
years; and 
•	Directors employed as executives of another entity where 
any of the company's executives serve on that entity's 
compensation committee (cross-compensation committee 
links).33 
Other Important Attributes 
•	Willingness of the members to devote a significant amount 
of time to the duties of the audit committee; 
•	Ability and willingness to inform themselves about the 
company and its industry to be able to rationally and 
objectively evaluate the company's financial reporting 
processes, financial statements, and financial disclosures; 
and 
•	Willingness to ask tough, probing questions of manage- 
ment, the internal audit department (if the company has 
one) and the independent auditors regarding these matters 
and to be persistent in getting adequate answer to their 
	. 	34 
questions 
Understanding of Fundamentals of Financial Statements and 
Reporting 
In the United States, securities market rules require financial 
literacy of every member of the audit committee. Every member of 
the audit committee must be able to read and understand 
fundamental financial statements, including the company's balance 
sheet, income statement and statement of cash flows. The rules 
also require a minimum of one member of the committee with 
employment experience in accounting or finance, requisite 
33 Fenwick & West, supra, at 4-5. The US NASD Marketplace Rule 4200(a)14 
and NYSE Listing Standard 303.01(B)(3) describe in precise terms directors that 
are not independent. 
34 Id. at p.5 
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Audit Committee in Corporate Governance 
professional certification in accounting or eguivalent experience or 
competence in financial monitoring duties.35 
In Nigeria, the Code of Good Governance for Public 
Companies requires that members of the audit committee should 
be able to read and understand basic financial statements so as to 
be able to make valuable contributions in the decision process of 
the committee. This is important because the committee has the 
crucial duty to review the reports of the external auditor and 
internal auditor. Importantly also, the Code requires of the 
committee members high level integrity and dedication. They also 
must have a sound understanding of the business, products and 
services of the company, the risks that it faces and the control that 
the company has in place." Ironically however, the Code remains 
persuasive only, lacking statutory backbone. It is submitted that the 
provisions of the Code be updated and enacted into statutory 
provisions. The update should prescribe penalties for audit 
committee's shirking of duties. This should discourage jostling for 
committee membership without the requisite knowledge and 
competence. 
Apart from functioning as counsellor and advisor, the audit 
committee also has the fiduciary duty to monitor and oversee 
management. This dual role requires balancing. An important way 
of striking the balance is to communicate frequently and openly 
with management so as to receive information, evaluate the 
information and challenge management if the need arises.37 
Communication between Management and Audit Committee 
It is important for Management and the audit committee to 
maintain a clearly understood line of transparent communication 
that enables the latter to challenge the overreaching of the former. 
Experts in corporate governance agree that management should 
have a checklist that facilitates its communication with the audit 
committee. The checklist should assist the audit committee in 
understanding the line and contents of communications to expect. 
Effective communication should make management seek the input 
35 NASDR Marketplace Rule 4350(d)(2)(A). With the exception of the fiat given 
to the Board of Directors of the companies listed on it, the NYSE Listing 
Standard 303.01(B)(2) makes similar provisions. 
36 The Code, supra, clause 13. 
37Id. 
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University of Ibadan Law Journal 
of the audit committee before reaching important decisions. 
Importantly also, management should maintain the line of com- 
munication in and outside committee meetings. 
A checklist that the Institute of Internal Auditors in the United 
States prescribes for communication requires that management 
•	is easily accessible; 
•	reaches out to the audit committee regularly; 
•	answers audit committee questions fully and completely; 
•	provides factual information to support responses; 
•	admits not knowing an answer; 
•	supports the audit committee by contacting additional 
resources and specialists; 
•	advises the audit committee of significant issues in a 
timely manner; and 
•	seeks audit committee input in advance of key decisions.i'' 
Key Issues of Internal Controls for the Audit Committee 
In the US in April 2008, RSM McGladrey held a forum on the 
responsibilities of the Audit Committee relating to internal controls 
and information technology (IT). The forum noted that monitoring 
of internal controls involves a corporation's audit committee, 
executive management, and operating management.I" It enjoins the 
audit committee to follow these best practices among other actions 
•	Implement and communicate a code of ethics; 
•	Establish a fraud-prevention programme 
•	Establish and communicate a whistleblower policy by 
following these steps: 
- Keep the message simple; 
- Consider using a toll-free ethics hotline maintained by 
a third party;, 
	- 	Consider whether communications are required in 
multiple languages; and 
	- 	Implement a way to track the reported events, 
investigations, and resolutions'? 
38 The Institute of Internal Auditors, supra. 
39 RSM McGladrey, "Audit Committee Best Practices" The CPA Journal 
Online, p.l 
4°Id. 
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Audit Committee in Corporate Governance 
RSM McGladrey asks the following questions to measure general 
effectiveness of the audit committee, including regulatory 
compliance: 
•	Does the Committee hold sufficient number of meeting of 
the length that enables it to cover the agenda and discuss 
the issues exhaustively? 
•	How does the Committee constructively challenge 
management's planned decisions, particularly in the area 
of financial reporting? 
•	Are regular meetings held between the Committee and the 
Chief Financial Officer, the chief audit executive (CAE, 
the leader of the internal audit team), other key members 
of the management team, and the independent auditors? 
Are the executive sessions conducted regularly? 
•	Does the Committee receive key information from 
management with sufficient time in advance of meetings 
to prepare for discussions at the meeting? 
•	Does a process exist for informing Committee members 
about the significant issues on a timely basis and in the 
.manner conducive to the audit committee having a full 
understanding of the issues and their implications? 
•	Is the Committee informed about personnel turnover in 
key functions, including the audit team (both internal and 
independent auditors), senior executives, and key per- 
sonnel on the financial accounting and reporting teams? 
Are unusual employee turnover situations observed for 
patterns or other indicators of problems'Z'! 
Conclusion 
The need for audit committee has been established beyond doubt. 
No doubt, there is an ongoing debate, to which this article has 
contributed, on the composition and the mode of constituting the 
committee as well as its functions and responsibility. There will be 
more on its roles, procedures and liability, but certainly not to 
obliterate it from the scheme of corporate governance. One thing 
that is clear is that in the face of recurrent corporate failures arising 
from manipulation and falsification of accounting records, the 
status and duties of audit committee membership must be 
41 Id. pp.1-2. 
218 

University of Ibadan Law Journal 
reappraised so that the committee could respond appropriately to 
emerging challenges. 
A legal framework that has no statutory prescription for the 
knowledge and competence of members of the audit committee is 
no longer acceptable. The current Nigerian system that allows any 
shareholder, even without any modicum of financial literary, to be 
elected as a committee member is faulty in conception and 
outdated. A system that does not hold the members of the audit 
committee liable for acts of omission or commission calls for a 
reappraisal. In my opinion, they should be liable for wrongdoing 
and compensated for serving appropriately. Finally, the duties and 
terms of reference of audit committees in Nigeria should have 
contents similar to those in the jurisdictions that this article 
examined. They should subsequently be updated to fit new 
challenges. 
219