Differences between audit committees in the public and private sectors

There are important differences between Audit and Risk Committees in the private and public sectors that the Committee members should be aware of.

Private sector

In the private sector, an Audit and Risk Committee (or equivalent) is usually a Committee of the board. The Audit and Risk Committee may have compliance responsibilities in addition to providing advice to the governors of the board. Another defining characteristic of a private sector Audit and Risk Committee is that it is ultimately primarily accountable to the corporation’s shareholders.

That model can work in the public sector too. For example, many public entities – such as state-owned enterprises and Crown Entities – have a board that selects a subcommittee to consider risks and ensure that the entity meets its compliance obligations. In these arrangements, shareholding Ministers appoint directors to a board and then an Audit and Risk Committee is selected from those board members.

Public sector

However, many entities in the public sector – such as a department in central government – do not have a board. A chief executive of a department is both a governor and a manager, and as a result the Audit and Risk Committee of a department typically plays a purely advisory role to the chief executive. Or in the case of local government, the governors of a local authority, district health board, or a board of trustees are elected by local communities, rather than through appointment.

Unlike a corporation, a department in central and local government are accountable to a broader range of stakeholders. This means that a public sector Audit and Risk Committee must also take account of matters such as public accountability. An awareness of these public expectations is particularly important given that entities in the public sector often have coercive powers (such as raising levies, setting fees, or enforcing laws), public funding, or other support from central government that a company does not have.

Successful governance is built on good information that supports shared understanding and mutual respect. Committee members coming from primarily a private sector background need to understand a public sector Audit and Risk Committee’s differing roles and responsibilities and the implications of those differences for their own roles.