Differences between audit committees in the public and private sectors

There are differences in the reasons for, and arrangements of, audit committees in the public and private sectors and in the public sector.

In the private sector, an audit committee is usually a committee of the board. Therefore, its role within the company is well understood and the expectations on it are clear. That model works in the public sector too. For example, many public entities have a board that selects a subcommittee to consider risks and ensure that the entity meets its compliance obligations. Examples of public entities where the audit committee is a subset of the board are State-owned enterprises and Crown Research Institutes. In these arrangements, shareholding Ministers appoint company directors to a board, and then an audit committee is selected from those board members.

Sometimes the form of governance in a public entity is different. There may be no board. Governance and management responsibilities can rest with the chief executive. Government departments are an example of this form of governance. Or the governors are wholly or partly elected. Local authorities, district health boards, and school boards of trustees are all elected by local communities.

Different organisational governance settings pose specific opportunities and challenges. At times, the audit committee provides advice at a distance from the real pressures and decision-making demands of a public entity. Audit committees are still valuable in this context, but they need to be clear about functions, roles, expectations, and the opportunities available to them and their entities. For example, the audit committee may only be advisory.

Audit committees can still help entity governors to test and challenge new ideas as well as business-as-usual operations to ensure that the entity is improving as well as meeting its expectations as a public entity. Public entities have different expectations than private entities because they often have coercive powers (such as raising levies, setting fees, or enforcing laws), public funding, or other support from central government.

Understanding the governance and management arrangements of the public sector and respecting the roles of governors and managers is important and public sector understanding within an audit committee can be a useful skill set. An audit committee must be aware of, and complementary to, a public entity’s governance arrangements and public accountability requirements if it is to give useful advice.

Successful governance is built on good information that supports shared understanding and mutual respect. Those from primarily a private sector background must work to understand the difference between the public and private sector use of audit committees and the implications of those differences for their roles. To give governors confidence in the audit committee’s work and advice, it must understand the entity, its needs, and its expectations of the audit committee.