Audit Committees
Key advice update No. 2, 2013
Introduction
Strong governance is crucial to the financial management of Victoria’s public sector agencies (agencies).
Compliance with the Financial Management Compliance Framework and the associated Standing Directions of
the Minister for Finance (Directions) is fundamental in achieving sound financial management within
departments and agencies.
The Directions prescribe sound practice and high-level requirements for financial management that allow
agencies to develop fit-for-purpose systems, procedures and practices that are tailored to their circumstances.
Purpose of this document
The purpose of this key advice update is to assist agencies in interpreting the requirements of Direction 2.2
Financial governance – Audit committees.
A number of issues or questions relating to the composition and function of audit committees have recently been
raised by agencies and during recent assurance reviews of the Financial Management Compliance Framework.
DTF’s advice and response to these questions is below.
Audit committee as component of Standing Directions
An agency’s audit committee provides an independent source of assurance and advice to that agency’s
Responsible Body.
The Responsible Body for:
 a government department is the Accountable Officer; and
 for every other public sector agency it is the board or, in the absence of a board, the person or body that is
charged with the oversight of the public sector agency’s operations.
An audit committee can advise the Responsible Body on financial reporting, risk management, internal control
and the adequacy of management to the board.
The Responsible Body retains oversight of the audit committee. The audit committee can be a committee of the
Responsible Body or be appointed by the Responsible Body.
Audit committee membership review
Standing Direction 2.2(e) requires each public sector agency to appoint an audit committee to oversee and advise
the agency on matters of accountability and internal control affecting the operations of the agency. Standing
Direction 2.2(s) requires that membership of the audit committee is to be reviewed by the Responsible Body on a
periodic basis, and at least every three years.
Recent feedback from assurance reviews highlighted that a review of audit committee membership is often
event-driven rather than time-driven (e.g. conducted at the end of a Board Director’s tenure rather than every
three years).
It is important to conduct a review of audit committee membership, on a periodic basis, to ensure the overall
composition of the audit committee continues to meet the requirements of the Standing Directions. The
requirements are that:
 the committee is comprised of at least three members all of whom are non-executive directors (where the
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Responsible Body is a board) – Procedure (g);
at least two members must be independent – Procedure (f);
the majority of the members must be independent – Procedure (g);
all members have a requisite level of competency in financial literacy and relevant industry knowledge –
Procedures (n) and (o); and
at least one member has appropriate expertise in financial accounting or auditing – Procedure (p).
Clarification of independence
Direction 2.2, Guideline 3 provides guidance on the definition of independence and points to a number of factors
that may affect an audit committee member’s independence. It provides that an independent person is one who
is independent of involvement in the day to day management of the public sector agency. This seeks to ensure
that the independent audit committee member acts in an objective, impartial manner, free from conflict of
interest, inherent bias or undue external influence.
Boards and non-executive directors
There has been some questions raised with DTF around Board directors and their audit committee independence.
A non-executive director is a member of the Board of directors of an agency who does not form part of the
executive management team. For example, they are not the Chief Executive Officer or Chief Finance and
Accounting Officer.
Generally speaking, audit committee members are sourced from non-executive directors on the Board. As such,
a non-executive board member (director) can also be an independent member of the audit committee. The
concepts of ‘non-executive director’ (i.e. member of the Board) and ‘independent audit committee member’ are
therefore not mutually exclusive.
A member’s period of service
Guideline 3 also provides that whether a non-executive director's independence is affected for the purposes of
them serving as an independent member of an audit committee should be judged on whether the member’s
service on the board or committee has been for a period which could, or could reasonably be perceived to
materially interfere with the person's ability to act in the best interests of the public sector agency.
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Other factors impacting independence
Other relationships that may be seen to impair an audit committee member’s independence include:
 current or previous employment by the agency or having been a director after ceasing to hold such
employment;
 receipt of material consulting, advisory or contractual relationship with the agency other than as committee
member of the agency; and
 any interest and any business or other relationship which could, or could reasonably be perceived to,
materially interfere with the person’s ability to act in the best interests of the agency.
Alternative arrangements
A Responsible Body may look beyond their own Board to appoint an external audit committee member should no
member of their Board be able to provide the appropriate expertise in financial accounting or auditing (as
required by Procedure (p)), or to meet the requirement for a majority of independent members.
For departments or agencies without a Board of directors, independent members must be external to the
department or agency. An employee of a department or the agency can be a member of the audit committee,
however they are not considered an ‘independent’ member.
An Accountable Officer or CFAO cannot be a member of an audit committee but can attend relevant aspects of
committee meetings by standing invitation (procedure (k)).
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