CFA Level II ExamCorporate IssuersEasy
A board of directors is reviewing its corporate governance practices. To ensure independent oversight of financial reporting, auditor selection, and internal controls, which committee is most crucial for fulfilling these responsibilities?
- ARisk Management Committee
- BAudit Committee
- CCompensation Committee
- DNominating and Governance Committee
Show answer & explanationAnswer & explanation
Correct answer: B. Audit Committee
The Audit Committee is specifically tasked with overseeing the company's financial reporting process, selecting and overseeing the external auditor, and reviewing the adequacy of internal controls. This committee plays a critical role in ensuring financial integrity and independence.
Why the other options are wrong
- A. The Risk Management Committee identifies and mitigates various business risks, but financial reporting oversight is primarily for the Audit Committee.
- C. The Compensation Committee focuses on executive compensation.
- D. The Nominating and Governance Committee handles board composition and governance issues, not financial reporting oversight directly.
Audit Committee
A committee of the board of directors responsible for overseeing the company's financial reporting process, internal controls, and the appointment and performance of external auditors.
- Composed entirely of independent directors.
- Ensures the integrity of financial statements.
- Acts as a liaison between the board and external auditors.
Memory trick: Audit checks the books, compensation pays the chiefs, nominee picks the board, risk spots the threats.