Recommendations on Audit Committees

The following is from a memorandum that went out to County Mayors and Finance Directors last week from the Division of County Audit.

The Local Government Modernization Act of 2005, Section 9-3-405, Tennessee Code Annotated (TCA), encourages local governments to consider establishing an audit committee and provides that the Comptroller may require an audit committee be established under certain conditions. The two conditions are when a local government is in noncompliance with the accounting and financial reporting standards required by the Governmental Accounting Standards Board or have recurring findings from the annual audit for three or more consecutive years as determined by the Comptroller to be a material weakness in internal control or material noncompliance with Government Auditing Standards.

We believe well structured audit committees can improve the financial management and overall governance of governmental entities in Tennessee. Our office (County Audit) has encouraged the establishment of an audit committee in local governments for many years. However, very few local governments have an effective audit committee. We believe in today’s environment of fewer resources and increased demand for transparency and accountability, it is time to focus on the audit committee
as an effective tool to improve the operations of local governments.

Beginning with the audits for the fiscal year ended June 30, 2010, when it has been determined that either of the conditions described in Section 9-3-405(a), TCA exists, there will be findings that address the county’s noncompliance with accounting and financial reporting standards and/or the existence of recurring audit findings. Both findings will include a recommendation encouraging the establishment of an audit committee under provisions of Section 9-3-405(a), TCA. If either of these conditions continue to occur, the county may be required to establish an audit committee. This committee will be responsible for addressing financial and other reporting practices, internal control, compliance with laws and regulations, and ethics. The audit committee should provide management with guidance to correct all reported material weaknesses in internal control and material noncompliance.

We (County Audit) will provide counties with guidelines regarding the establishment of effective audit committees. Please contact the Division of County Audit if you have any questions.