Conoy Co designs and manufactures luxury motor vehicles. The company employs 2，500 staff and consistently makes a net profit of between 10% and 15% of sales. Conoy Co is not listed； its shares are held by 15 individuals， most of them from the same family. The maximum shareholding is 15% of the share capital.
The executive directors are drawn mainly from the shareholders. There are no non-executive directors because the company legislation in Conoy Co‘s jurisdiction does not require any. The executive directors are very successful in running Conoy Co， partly from their training in production and management techniques， and partly from their ’hands-on‘ approach providing motivation to employees.
The board are considering a significant expansion of the company. However， the company‘s bankers are concerned with the standard of financial reporting as the financial director （FD） has recently left Conoy Co. The board are delaying provision of additional financial information until a new FD is appointed.
Conoy Co does have an internal audit department， although the chief internal auditor frequently comments that the board of Conoy Co do not understand his reports or provide sufficient support for his department or the internal control systems within Conoy Co. The board of Conoy Co concur with this view. Anders & Co， the external auditors have also expressed concern in this area and the fact that the internal audit department focuses work on control systems， not financial reporting. Anders & Co are appointed by and report to the board of Conoy Co.
The board of Conoy Co are considering a proposal from the chief internal auditor to establish an audit committee. The committee would consist of one executive director， the chief internal auditor as well as three new appointees. One appointee would have a non-executive seat on the board of directors.
Required：
Discuss the benefits to Conoy Co of forming an audit committee. （12 marks）
参考答案：
Benefits of audit committee in Conoy Ltd
Assistance with financial reporting (no finance expertise)
The executive directors of Conoy Ltd do not appear to have any specific financial skills – as the financial director has recently
left the company and has not yet been replaced. This may mean that financial reporting in Conoy Ltd is limited or that the
other non-financial directors spend a significant amount of time keeping up to date on financial reporting issues.
An audit committee will assist Conoy Ltd by providing specialist knowledge of financial reporting on a temporary basis – at
least one of the new appointees should have relevant and recent financial reporting experience under codes of corporate
governance. This will allow the executive directors to focus on running Conoy Ltd.
Enhance internal control systems
The board of Conoy Ltd do not necessarily understand the work of the internal auditor, or the need for control systems. This
means that internal control within Conoy may be inadequate or that employees may not recognise the importance of internal
control systems within an organisation.
The audit committee can raise awareness of the need for good internal control systems simply by being present in Conoy Ltd
and by educating the board on the need for sound controls. Improving the internal control ‘climate’ will ensure the need for
internal controls is understood and reduce control errors.
Reliance on external auditors
Conoy Ltd’s external auditors currently report to the board of Conoy Ltd. As previously noted, the lack of financial and control
expertise on the board will mean that external auditor reports and advice will not necessarily be understood – and the board
may rely too much on external auditors.
If Conoy Ltd report to an audit committee this will decrease the dependence of the board on the external auditors. The audit
committee can take time to understand the external auditor’s comments, and then via the non-executive director, ensure that
the board take action on those comments.
Appointment of external auditors
At present, the board of Conoy Ltd appoint the external auditors. This raises issues of independence as the board may become
too familiar with the external auditors and so appoint on this friendship rather than merit.
If an audit committee is established, then this committee can recommend the appointment of the external auditors. The
committee will have the time and expertise to review the quality of service provided by the external auditors, removing the
independence issue.
Corporate governance requirements – best practice
Conoy Ltd do not need to follow corporate governance requirements (the company is not listed). However, not following those
requirements may start to have adverse effects on Conoy Ltd. For example, Conoy Ltd’s bank is already concerned about the
lack of transparency in reporting.
Establishing an audit committee will show that the board of Conoy Ltd are committed to maintaining appropriate internal
systems in the company and providing the standard of reporting expected by large companies. Obtaining the new bank loan
should also be easier as the bank will be satisfied with financial reporting standards.
Given no non-executives – independent advice to board
Currently Conoy Ltd does not have any non-executive directors. This means that the decisions of the executive directors are
not being challenged by other directors independent of the company and with little or no financial interest in the company.
The appointment of an audit committee with one non-executive director on the board of Conoy Ltd will start to provide some
non-executive input to board meetings. While not sufficient in terms of corporate governance requirements (about equal
numbers of executive and non-executive directors are expected) it does show the board of Conoy Ltd are attempting to
establish appropriate governance systems.
Advice on risk management
Finally, there are other general areas where Conoy Ltd would benefit from an audit committee. For example, lack of corporate
governance structures probably means Conoy Ltd does not have a risk management committee. The audit committee can also
provide advice on risk management, helping to decrease the risk exposure of the company.