Audit Committee Responsibilities

For Reviewing Audited Financial Statements

One of the most important responsibilities of the Audit Committee is to serve as "gatekeeper" for the release of financial statements. These financial statements are used by fiscal analysts that evaluate the credit worthiness of the State of Minnesota and the Minnesota State Colleges and Universities. Other users include potential donors, legislators, faculty and student unions, and other interested stakeholders. The amounts and disclosures presented in the financial statements must be accurate and reliable.

Audit Committee members are not expected to be professional accountants, but must possess sufficient awareness of the financial reporting principles to satisfy themselves that the financial statements have been prepared and audited reasonably. Members not familiar with financial statements may wish to do a little homework.

The U.S. Securities and Exchange Commission provides a web site that offers an overview of financial statements. The web site is designed for financial statements of publicly traded companies and contains some components that are not applicable to public higher education, such as stockholder's equity and income tax liability. It provides a good basic overview, though, of the primary financial statements, major accounts, and note disclosures.

IBM offers another web site that also is designed for beginning financial statement readers. Although a web site designed specifically for higher education is not available, the Minnesota State Colleges and Universities system follows a business model of financial reporting that is based on the financial statements described at the SEC and IBM sites.

The professional organization responsible for establishing financial reporting principles for public colleges and universities is the Governmental Accounting Standards Board (GASB). More in-depth information on the GASB web site.

In order to authorize the release of the financial statements, Audit Committee members must gain a sufficient understanding and become satisfied with several matters, including:

• Have the external auditors fulfilled their responsibilities, including adequate testing of the financial statements and acceptable limitations on the scope of their work? Learn more about the role of the external auditor.
• Are the core business activities of higher education fairly presented in the financial statements? Core business activities of higher education.
• Have high risk transactions been measured reasonably and not imperil the reliability of the financial statements? Learn more about high risk transactions.
• Are internal controls effective in supporting the preparation of the financial statements? Learn more about the effectiveness of internal controls.
• Has the risk of fraudulent financial reporting been considered and reduced to an acceptable level? Learn more about the risks of fraud.

Pulling It All Together

Ultimately, Audit Committee members must reach a point where they have confidence in the reliability of the financial statements. Members are not expected, however, to be experts in financial reporting principles. Rather they need an awareness of the challenges associated with producing financial statements. The external auditor is a primary resource for the Audit Committee members to gain confidence in the financial reports. Professional standard require external auditors to communicate critical information about the financial reporting and auditing process to the Audit Committee. Based on that information and responses to additional inquiries posed by committee members, the Audit Committee will be able to fulfill its "gatekeeper" role successfully and authorize the release of the financial statements.