Audit committees play a crucial governance role in overseeing companies’ financial reporting and disclosure. In recent years, as companies expand their investment activities, audit committees are also tasked with monitoring investment risks. An effective audit committee should regularly review the company’s investment policies, risk management frameworks, valuation methodologies, and compliance controls. By 2020, global audit committees have identified several best practices to strengthen investment oversight.
Clarify the audit committee’s role in investment governance
The audit committee should have clear terms of reference regarding its responsibilities in investment governance. This includes reviewing investment policies, monitoring investment risks, overseeing valuations, and assessing the effectiveness of compliance controls. The terms of reference should be aligned with the company’s investment risk appetite and portfolio composition. The audit committee should also coordinate with other board committees for a holistic oversight of investments.
Enhance transparency through robust investment reporting
The audit committee should require management to provide comprehensive reporting on investment activities and risks. Reporting should cover investment performance benchmarks, risk exposures, stress testing results, valuation methodologies, and incidents of non-compliance. The committee should scrutinize the completeness, accuracy and timeliness of investment reports. Information gaps should be highlighted for management’s follow-up.
Evaluate investment valuation methodologies
A key focus area is assessing the appropriateness of methodologies used to value complex investment products. The audit committee should understand the valuation techniques, key assumptions and inputs adopted. It should also review the independent price verification controls and results. Material differences between internal and independent valuations should warrant further investigation.
Monitor investment compliance and controls
The audit committee provides important oversight of investment compliance, including adherence to approved mandates, regulatory requirements, accounting standards and internal policies. It should assess the effectiveness of compliance monitoring and controls across the investment lifecycle through inquiries with management, compliance teams, internal audit, and external auditors.
An effective audit committee is essential for governance and risk management of corporate investments. By clarifying oversight responsibilities, enhancing transparency, scrutinizing valuations, and monitoring compliance, the audit committee can provide the board and investors assurance on investment risks.