The EVP here at my bank is telling me that many banks have management as members of the Audit Committee. All the resources & training materials I have say the Audit Committee should be outside directors. I am new at internal audit, so I was hoping you all could give me some feedback about this. I'm hoping for lots of responses to be able to share with the EVP. Thanks in advance for your help!

We have board members and senior management, ie senior lender as members of our Audit committee.

What is the size of your bank? Our audit committee consisted of only outside directors.

Our bank is a very small community bank, < $100 million. Our audit committee is all outside directors also, but it sounds like my EVP is thinking of adding someone from management.

Will you have an opportunity to discuss any issues with the audit committee without management present? At times we had management present during meetings, but they were not there for the entire meeting so that audit committee and myself could discuss any issues. If you have that time available, I wouldn't worry about having management present if that is approved. Save the sensitive items for the time you have alone with audit committee.

As things stand right now, yes I can meet with the audit committee without management. But he is talking about having a member of management be a member of the audit committee, so then management would be at all audit committee meetings I imagine, and it would be tough to say one member of the committee should excuse him/herself from a certain meeting. That is why I don't understand how management serving on the committee would work.

we include managament in the audit committee as guests. they are not audit committee members. we dismiss them near the end of the meeting to give the committee an opportunity to discuss issues without management present.

we started doing this in the past year or so and it has been very benificial.

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We have the same set-up as Jason....
It works very well.

I would encourage management to remain a guest. It will compromise the Independence of your whole audit program to do otherwise.

Thanks Mr. Carey, that's how I thought it should be, but wanted a little back up in case it comes to fruition!

Mr.!? Oh God am I getting that old???

Sorry, just trying to be respectful. I'm sure you are younger than I am and I know what you mean, I really can't stand to be called "maam". So next time I'll just say Randy ok?

Fair enough - enjoy your weekend!!

We too had internal and external members with the internal leaving at the end and allowing audit to meet individually with external directors. When we had external auditors there, they too stayed for the final moments. Oddly, I as compliance also left at the end. I reported my finding through the audit committee, but I was not a direct report of theirs as was the auditor, on an org chart.

Publicly held banks can no longer have management on the committee, and generally they aren't even welcome at the committee any longer, due to SOX. That is becoming a best practice in non-publicly held as well.

Absent SOX, I have seen situations where it works well because management has a great attitude toward doing the right thing. I have also seen the downside.

At a prior bank I was at there were no insiders on the A/C and we all felt free to discuss any issues concerning management. I currently have the bank president on the audit committee and don't like it. Now that is not the case. And to make matters worse, if I am talking about some problem involving an employee, the president sometimes comes to their defense when he should be siding with me on making sure proper policies and procedures are followed.

Been there. Bad situation. A prime example of why it should not be done.

Scubadave, your scenario is exactly my fear, especially since we have never had an internal audit program before, and the "management", whoever it ends up being, may not understand that defending/protecting the employee is perhaps part of the problem. I told my EVP what all you BOLers have said and he seems to be backing off a little, so thanks so much for your input!

The GAO has completed a review and found, not surprisingly, that smaller companies have suffered a disproportionate expense addressing SOX. Perhaps there is some relief in sight but I don't know that these issues on audit or small bank issues in general will be addressed. Here is a recap.

Quote:

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The committee plans to issue a report in April 2006 that will recommend, in effect, a tiered approach with certain smaller public companies partially or fully exempt from section 404, “unless and until” a framework for assessing internal control over financial reporting is developed that recognizes the characteristics and needs of smaller public companies.

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Our committee consists of outside directors. Management is occassionally invited. This has been working well for us. What does the Audit Committee Chairman think of the EVPs request? Does your bank have an Audit Committee Charter that addresses this?

Haven't talked to the Audit Committee yet, and we are in the process of adopting a new Charter (because our old one did not address internal audit) and the proposed charter states "The committee shall comprise at least three directors, each of whom are independent of management and the Bank". I have an audit committee meeting this afternoon, and I guess if they formally approve this charter, then the point becomes moot! I'm sure the EVP will want to be present at some of the meetings, and I guess that will be up to the Audit Committee, but at least if we adopt this charter no-one in management will actually be a member of the committee. This is how I would prefer it.

Our bank president used to be a member of the audit committee until last year's exam. The examiners didn't like and he is no longer on the committee, just outside directors.

Andy, the SOX relief relates primarily to testing of internal controls, and probably will relate to testing by the external auditors. It won't relate to tone or ethical considerations. The expense came from the testing work which in many cases involved consultants assisting with the bank's testing and then an equal or greater expense for the externals to conduct their own testing.

Lived it myself.

Our committee is comprised of outside directors. Senior management is invited as a guest only. I have a private session with the committee, during which time nobody from management is in attendance. The larger the bank the more important independence becomes. FDICIA 112 also has certain mandates on committee independence, depending on the size of your bank. Hope this helps.