The roles, responsibilities, and powers of delegation of the board of directors are defined in its corporate bylaws and committee charters in accordance with applicable regulatory and listing requirements. For external financial reporting purposes, the board typically forms an audit committee whose responsibilities include overseeing:

Audit committee members typically demonstrate independence of thought and substance by absence of any material financial or other personal ties to the company, which could impede their ability to provide unbiased guidance and oversight.

The responsibility of the board and audit committee is to oversee management's performance of internal control. The board must therefore retain objectivity in relation to management.

Every year, the board of directors of Northern Power, a distributor of electricity, commissions an effectiveness evaluation of its audit committee. An independent consultant with expertise in governance reviews the means by which the audit committee fulfills its responsibilities, as set out in its charter. Specifically, it evaluates how the members of the audit committee:

The results of the evaluation are used to determine whether the roles and responsibilities of the committee have been met and could result in committee member changes or impact remuneration. In addition to the annual review, every three years the company conducts a benchmark review against leading practices and refines its charter, as appropriate.

Public Aid is a governmental agency that is subject to oversight by various bodies, representing knowledgeable and independent officials. In terms of its financial reporting, key roles include the following:

The comptroller general is responsible for providing government-wide functional direction and assurance for financial management and stewardship over public resources, as assigned by the Treasury Board, in collaboration with other central agencies. He provides oversight of government-wide financial information systems and quarterly financial reporting. He monitors the qualifications and competence of the financial management community across government for all aspects of financial management and reports periodically to the Treasury Board on the state of financial management across government agencies.

The board of directors reviews and approves policies and practices that support the performance of internal control across the business in regular meetings between management and the board. The processes and structures particularly relevant to the audit committee of the board are those that provide:

The policies and practices are updated as needed to reflect changes in internal and external expectations, including rules and regulations.

The audit committee of Outer Limits Innovations, an aerospace control systems supplier, uses its charter as guidance when setting its meeting dates and agendas. Fred Krahn, the chair of the committee, plans for at least one meeting during the year at which each responsibility set forth in the charter is discussed. This practice helps the audit committee to cover all relevant responsibilities and management to anticipate and plan for the committee's expectations. The meeting calendar, which is shown below, is periodically reassessed to adjust for emerging regulatory and technical matters that could affect the company or the industry.

The audit committee of Millennium Lighting, a manufacturer of lighting and ventilation equipment, is chaired by Janis White, a CPA with financial reporting expertise and previous public accounting experience. Ms. White regularly distributes to the committee members any updates from management on technical matters, such as new accounting standards or developments affecting the company and related financial statement implications.

Before each committee meeting, she circulates the draft agenda both to the committee members and the external auditors to solicit their input on any additional technical accounting agenda items they would like to discuss. Ms. White is committed to keeping open channels of communication with the external audit engagement partner and the company's chief audit executive to ensure she receives timely updates on any discussions occurring with management as technical matters emerge. Internal audit, litigation, and corporate social responsibility are a few of the areas that are regularly solicited for input by the board or audit committee.

The board of directors periodically assesses and confirms its collective ability to provide effective oversight. Through independent review and self-assessment it determines the adequacy of its composition, whether it has sufficient independent members, and the appropriate expertise.

To meet the entity's external financial reporting objectives, the board of directors identifies certain board candidates who are independent of both management and the entity and who have requisite financial reporting and other relevant expertise. These members are typically assigned to the audit committee. ^{fn 9} Such expertise may be established through professional networks and organizations and by educational institutions whose missions are aligned to the advancement of the financial reporting profession.

The board reviews the results of due diligence performed on potential board candidates and confirms their competence and ability to remain unbiased. The procedures to ensure that potential board members meet the defined criteria may include:

Giante Ore is a mining exploration company whose shares are traded on an "over-the-counter" bulletin board. Giante Ore has long maintained a board of directors that includes three of the CEO's family members and three outside, but not independent, directors: the company's outside legal counsel, a venture capitalist, and a personal friend of the CEO.

Giante Ore recognized that it needed to strengthen its control environment and board effectiveness. To that end, it revisited its board structure. The three relatives and one personal friend of the CEO left the board and have been replaced by four independent directors, all of whom are financially literate. One of the four has specific financial expertise. These directors have now been appointed to a newly formed audit committee with its responsibilities set forth in a charter.

When Greene Inc. needs to identify new members for its board, it follows a detailed procedure to ensure the best possible candidates are chosen. The nominating committee works with the human resources department, the legal department, and an independent executive search firm to identify candidates and conduct due diligence in support of the interest of the company in its short- and longer-term objectives. The key skills it has identified are financial literacy, liquidity risk management expertise, business continuity planning, and corporate social responsibility reporting experience that reflects the business performance expectations of the company's stakeholders.

The same team conducts an annual review to ensure that board members continue to have the requisite competence and independence given the entity's stakeholder needs. The senior management of Greene Inc. provides the results of the review in its public filings.

The board demonstrates an appropriate level of skepticism of management's assertions and judgments that affect financial reporting by asking probing questions. In particular, the audit committee of the board seeks clarification and justification of the company's process for:

Custom Engineering manufactures specialty polymer products. The audit committee meets regularly with management to review the reasonableness of management's assumptions and judgment used to develop significant estimates. The committee then meets privately with the external auditor to discuss its assessment of management's estimates and the related impact on financial reporting.

This practice is carried out for all assumptions related to key financial statement accounts, disclosures, and relevant assertions most subject to management judgment and bias. For example, for Custom Engineering's annual goodwill evaluation, management provides relevant information on any specialists engaged to assist the company, key judgments and assumptions included in the company's discounted cash flow model, plausible sensitivity scenarios that were considered, and confirmation of the appropriate technical accounting standard applied.

The audit committee of the board meets regularly with internal and external auditors as well as independent reviewers, in private when necessary, to review and discuss such topics as:

Sara Greenburg is the chair of the audit committee of Seaworthy Solutions, a marine construction services provider. In accordance with the audit committee charter, she arranges for the committee to meet quarterly with the external auditor to discuss a wide range of issues such as audit scope, testing plans, internal control over external financial reporting, quality of financial reporting, and audit findings and recommendations. She is responsible for coordinating the audit committee's evaluation of the external auditor. She bases her evaluation on a number of considerations, including the firm's reputation, the qualifications of the audit partner and team, knowledge and experience in the company's industry, and the firm's quality control procedures. Ms. Greenburg believes that these interactions, supplemented as needed with interim conversations, effectively positions her to monitor the external auditor's performance and make an informed judgment on any need to modify or terminate the relationship.

The audit committee also regularly meets with Seaworthy's chief audit executive to ensure that the same oversight objectives of the internal audit function are attained. The chief audit executive reports directly to the audit committee to enable an objective mindset within the internal audit organization and to facilitate the escalation of issues independent of management, if so required.

The audit committee considers information obtained from the company's whistle-blower and anti-fraud programs (or similar processes) to monitor the risks in misstatements in financial reporting. These may include risks of inappropriate acts by staff and management override of controls. The audit committee reviews any whistle-blower allegations and evaluates management's analysis of significant matters, potential impact on financial reporting, and corrective actions being taken.

Start-up Inc. is a privately held company that has grown rapidly and now faces heightened competition and declining margins. The owners have become increasingly concerned about the potential for fraud and management override to make quarterly results look more favorable and meet performance targets. In response, Human Resources has made a help line available to management and staff, and an external service provider now provides a hotline for anonymously reporting breaches of ethics and integrity that could impact external financial reporting. The owners review all allegations received, assign the cases for investigation, and review the findings to understand the motivations, opportunities, and rationalizations for management override and how those activities might be concealed, and to ensure prompt corrective action is taken.

Generation Now is an electricity transmission and distribution company that periodically receives calls on its whistle-blower hotline. The business ethics committee chaired by the general counsel reviews the logs of all calls and determines the appropriate course for follow-up action. Matters are opened and assigned to internal audit for investigation and proposed resolution by senior management and the board, as appropriate. Investigations are carried out by internal auditors or others who are independent of the issue. Every quarter, internal audit, working in conjunction with the general counsel, provides a status report of progress and proposed resolutions relating to each call. The board and management determine the final resolution and oversee any follow-up actions. ^{fn 10}