Criticisms of Excellent Berhad's Audit Committee

In an era when trust in business is at a premium, and scrutiny from stakeholders is ever wider and more intense, it has never been more important for organisations to behave in accordance with their core purpose and principles in order to protect reputation and trust. Corporate governance is a vital mechanism through which boards can ensure that the behaviours of their workforce are aligned to the organisation's purpose and principles - and that corporate goals and values are translated into their people's decisions and actions.

For some, corporate governance is primarily about legal structures. For others, it's mainly about business controls, and the check and balances on how people carry out their work. For a third group, it's a much wider concept encompassing the entire way a business is led and managed.

Excellent Berhad, an information and communication technology (ICT) company, decided to enhance its internal audit function. Its board of directors approached KPGG, a reputable external consultant, to help with this exercise. One of KPGG's staff, Salina, explained that internal audit is important no matter what industry a company is in.

Salina was keen to talk to Dato' Kamil, the Head of the Audit Committee cum Chairman of the Board. Dato' Kamil explained that since Excellent Berhad was an ICT company, he considered it important that all members of the audit committee must be professional IT engineers in order for them to fully understand the industry and its technical challenges. All four members of the Audit Committee were non-independent non-executive directors and all were recently retired members of Excellent Berhad's management board. When Salina asked about the relationship with external auditors, Dato' Kamil said that they had an 'excellent' relationship, adding that this was because the external audit practice was run by the Chief Executive Officer's son. In the previous year, the Audit Committee members met once with the external auditors.

Salina's opinion is that effective internal controls are essential for maintaining the integrity of financial reporting, and the enhancement of the internal audit function would ensure the betterment of the company.

QB1. Criticize the ways in which Excellent Berhad audit committee has failed to meet the best practice. (7 marks)*

QB2. Why is the audit committee responsible for overseeing the internal audit function? Justify your reasons. (7 marks)*

QB3. Does Excellent Berhad comply with the concept if independence? (6 marks)*