When a company is listed on the stock exchange, it should appoint an audit committee within the supervisory board. The committee must include an independent director with audit or accounting competence.
Audit committees have functioned for years in public companies listed on foreign markets. Broadly speaking, the audit committee is a kind of working group within the supervisory board. The role of the committee is to exercise financial oversight of the company’s operations. Based on recommendations by the European Commission, the main purpose of the committee should be to improve the work of the supervisory board by assuring that decisions are taken after due consideration, and to assist in organising the work of the supervisory board to avoid material conflicts of interest in the board’s decisions.
In Poland, the Act on Auditors dated 7 May 2009 provides for a legal obligation to establish an audit committee in certain companies, including companies whose shares are listed on the stock exchange. The committee must comprise at least three members, at least one of whom meets the standards for independence and holds qualifications in accounting or audit. The member will be deemed independent if he or she:
- does not hold shares in the company,
- did not participate in maintaining the company’s accounting books or preparing its financial report during the past three years, and
- is not related to a member of the company’s managerial, supervisory or administrative authorities (in the direct line, by blood or marriage, to the second degree, or through guardianship or adoption).
The act does not define more precisely the requirement for this member of the audit committee to hold qualifications in accounting or audit. The EU recommendations concerning the audit committee use the term “competence”. Because this requirement under Polish law is included in the Act on Auditors, one might think that in order to meet this requirement the member would have to be a qualified auditor. But this conclusion seems unwarranted, because the wording of the act refers to “qualifications in the field of accounting or financial review”. The statutory tasks of the audit committee provide an additional clue to the nature of the required qualifications. These tasks include monitoring the financial reporting process, the effectiveness of internal audit systems, and the independence of the external auditors, from which it may be concluded that a member of the audit committee must be capable of performing these tasks.
In any event, it is essential that one and the same person who is a member of the audit committee must both be independent and hold the relevant qualifications.
The conditions for independence in the case of an audit committee member are different from those applicable to members of the supervisory board under the Code of Best Practice for Warsaw Stock Exchange Listed Companies, which require that at last two members of the supervisory board be “independent from the company and entities with significant connections with the company.” A person who is a member of the audit committee and meets the statutory criteria for independence may not meet the WSE criteria. In that case, it may be necessary to appoint additional persons to the supervisory board who meet the independence criteria under WSE best practice, or recognise the failure to comply with this provision of WSE best practice and publish an explanation for the failure to comply.
The members of the audit committee are appointed from among the members of the supervisory board, by a resolution of the board.
If the supervisory board has five members, the tasks of the audit committee may be assigned to the supervisory board as a whole. How exactly this should be done is not explained in the regulations. The Polish Financial Supervision Authority takes the position that in this situation a shareholders’ resolution is required, under the reasoning that the supervisory board may not assign such tasks to itself.
The audit committee is assigned the role of monitoring the financial reporting process, the effectiveness of internal audit systems, and risk management, as well as conducting financial oversight. The committee’s tasks also include monitoring the independence of the auditor and the entity appointed to examine the financial reports, and providing a recommendation to the supervisory board on their appointment.
Companies intending to seek a listing on the WSE must consider the requirement to create an audit committee far enough in advance in order to assure that a person is appointed to the supervisory board who meets the required criteria. If the tasks of the audit committee are to be assigned to the supervisory board as a whole, a shareholder resolution to this effect should be adopted. It is also important to address the authority and actions of the audit committee in the company’s internal regulations, such as the statute and the supervisory board bylaws. The prospectus must include information about the company’s appointment of an audit committee, or its plans to establish the committee, as well as biographical information about the supervisory board member who will serve on the audit committee and meets the requirements for independence and qualifications.
Capital Markets practice, Wardyński & Partners