Advantages and disadvantages of audit committees

The key advantage to an external auditor of having an audit committee is that such a committee of

independent non-executive directors provides the auditor with an independent point of reference other

than the executive directors of the company, in the event of disagreement arising.

Advantage

1. It will lead to increased confidence in the credibility and objectivity of financial reports.
3. By specialising in the problems of financial reporting and thus, to some extent, fulfilling the directors' responsibility in this area, it will allow the executive directors to devote their attention to management.
4. In cases where the interests of the company, the executive directors and the employees conflict, the audit committee might provide an impartial body for the auditors to consult.
5. The internal auditors will be able to report to the audit committee

Disadvantage

1. There may be difficulty selecting sufficient non-executive directors with the necessary competence in auditing matters for the committee to be really effective.
3. The establishment of such a formalised reporting procedure may dissuade the auditors from raising matters of judgement and limit them to reporting only on matters of fact.
4. Costs may be increased.