Audit Committees: Ensuring Accountability in Kenyan County Governance

By Grace Amurle

How Effective Are the Audit Committees at The County Government Level?

The Audit Committee (AC) has been extensively used in organizations globally to monitor the financial reporting process and corporate governance. They have existed for decades, but there are criticisms regarding their effectiveness as a result of vetting the integrity of the entity’s financial statement and monitoring financial statement fraud. 

The criticisms mainly center on the recurrence of financial scandals even where such committees exist. Spira (1999) suggests that ACs’ popularity lies within their superficial ceremonial function, providing comfort and reassurance for stakeholders rather than being truly effective in supporting sound governance.

Effective audit committees in the public sector are essential in Kenya, especially since countless financial scandals have plagued public institutions. The Public Finance Management Act (PFMA), 2012 and Public Finance Management Regulation, 2015 require that each public entity establish an Audit Committee. Section 155(5) of the PFMA requires each County Government entity to establish an audit committee whose composition and functions are as prescribed by the Regulations. Paragraphs 167 to 175 of the PFMAR (County Government) deal with the audit committees’ establishment, duties, composition, etc.

The audit committee is integral to good governance: transparency, accountability and improved financial Management. It plays a key role in the integrity of the government department’s financial reporting (George, 2005:43). This is why audit committees have become a legislative requirement for the government. Regarding the Public Finance Management Act of 2012, audit committees are compulsory for national and county governments and public entities under government control. 

In 2016, through Gazette Notice No. 2690, the government issued Audit committee guidelines and established Audit Committees in county government. Almost ten years after establishing audit committees at the counties, the Auditor General reports for the financial years 2020/21 and 2021/22 reported qualified audit opinions in all the forty – seven counties’ financial statements. In addition, the Auditor General reports indicate glaring discrepancies in the financial management systems, misuse of resources, weak or non-existent risk management policies as required by the Public Finance Management Act, and flouting of procurement regulations, among others.  Similarly, the Institute of Certified Public Accountants of Kenya (ICPAK) County Public Audit Review report,2024, which covered three financial years 2020/21, 2021/22 and 2022/23, pointed out weaknesses in the county’s internal control systems, financial Management, risk management and overall governance.

These issues should have been addressed if the Audit Committees were compelling enough. It also raises questions on the effectiveness of the internal audit function in counties since they report to the audit committees. Issues of their independence, objective and competency become a concern. This situation may worsen when the counties transition to the Accrual Basis of Accounting as this requires skills and expertise of both the internal audit function and the audit committees. In addition, the Internal Audit Functions and the Audit Committees must adopt and implement the new Global Auditing Guidelines, which will take effect from 9th January 2025.

According to the Institute of Internal Auditors (IIA), internal audits constitute a third line of defence in risk management. Management and the Board are responsible for achieving the entity’s strategic objectives as set in its strategic plan and, therefore, play an essential role as the first and second line of defence. According to IIA, the second line roles focus on specific risk management objectives, such as compliance with laws, regulations, and acceptable ethical behaviour; controls; information and technology security; sustainability; and quality assurance.

The audit committee’s principal role is to provide oversight of financial reporting, risk management, internal control, and governance processes, as provided in the Audit Committee Guidelines Gazette Notice No. 2690.

The primary function of the audit committee is to support the Accounting Officer regarding their responsibilities for issues of risk, control, governance, and associated assurance, provided that Management remains responsible for managing risk, control, and governance processes.

The Audit Committee will provide oversight, advice, and assurance in the following areas:

• Internal Control System;
  • Governance structures;
  • Risk management;
  • Financial statements
  • Compliance requirements;
  • Internal audit, including approval of annual work plans;
  • External audit; and
  • Other related functions including review of entity’s performance framework; relevant assembly committee reports and recommendations; and portfolio responsibilities.

Attributes Of Effective Audit Committees

Several studies and guidelines have identified attributes of an effective audit committee as follows:

1. Independence: Independence ensures that the Audit Committee operate without undue influence from management, allowing them to make objective decisions in the best interest of shareholders.
2. Expertise and Experience: The competence and experience of audit committee members are essential for effective oversight of financial reporting. Strong understanding of accounting principles, financial reporting, and relevant laws and regulations, IT.
3. Communication Skills: Effective communication among audit committee members, external auditors, internal auditors, and management is crucial for ensuring that all relevant information is shared and understood. Good communication skills help in facilitating discussions and resolving issues efficiently.
4. Commitment and Time: Members of the audit committee should be committed to their responsibilities and willing to dedicate the necessary time to fulfill their duties effectively. This includes attending meetings, reviewing documents, and staying informed about relevant industry developments.
5. Relationship with External Auditors: The relationship between the audit committee and external auditors is critical. An open and constructive relationship based on trust and independence allows for thorough audits and effective oversight of financial reporting
6. Risk Management Oversight: An effective audit committee should have a clear understanding of the organization’s risk management processes and actively participate in overseeing the identification, assessment and mitigation of financial and operational risks.
7. Regulatory Environment: Compliance with relevant laws, regulations, and corporate governance guidelines is essential for audit committee effectiveness. Keeping abreast of changes in the regulatory environment helps the committee adapt its practices to meet evolving requirements.
8. Whistleblower Mechanisms: Providing mechanisms for internal and external whistleblowers to report concerns about financial improprieties or ethical lapses can enhance the effectiveness of audit committees by allowing for timely investigation and resolution of potential issues.
9. Evaluation and Continuous Improvement: Regular evaluation of the audit committee’s performance and effectiveness is important for identifying areas of improvement. Implementing feedback and continuously enhancing processes can help strengthen the committee’s oversight function.

Kenya has made significant efforts to establish best global practices and institute suitable corporate governance structures in government institutions nationwide. This includes establishing audit committees in both the national and county governments as a key player in enhancing good governance. There is now a need to review the effectiveness of the audit committees at the county level with the aim of addressing any gaps and challenges.

Email- grace.amurle@gmail.com