Thursday, March 3, 2011

Legal Developments in Oman

Audit Committees
The Commercial Companies Law requires the board of directors of an Omani joint-stock company to form various committees from among its members to discharge some of the board’s delegated functions.

One such committee is the audit committee, which a publicly listed joint-stock company (an “SAOG”) is required to have. The composition and functions of an SAOG’s audit committee are prescribed by the ‘Rules on the Constitution of Audit Committee’ published by the Capital Markets Authority.

Composition and Purpose of the Audit Committee

The audit committee must consist of at least three non-executive members of the company’s board of directors – i.e., directors who are not salaried employees of the company. A majority of the audit committee members, including the chairman of the audit committee, must be independent directors – i.e, they and their first-degree relatives must not have occupied a senior post in the company (such as Chief Executive Officer or General Manager) over the past two years. At least one member of the audit committee must have financial and accounting expertise.

The purpose of the audit committee is to assist the board in ensuring the:

• reliability of financial reporting;
• effectiveness of internal controls; and
• legal and regulatory compliance.

The board decision appointing the audit committee should, inter alia, specify the terms of reference for the committee’s functioning, the location and quorum requirements for the committee’s meetings, and the methodology for the committee’s execution of its responsibilities.

The audit committee should specify in its charter for the board’s approval its objectives, membership, powers, responsibilities and liabilities, and the remuneration of its members.

Functions of the Audit Committee

An audit committee’s predominant function is the oversight of financial reporting and internal disclosure mechanisms within the company. This is why the Capital Market Authority requires audit committee members to be non-executive (and majority-independent) directors: an independent audit committee significantly enhances internal controls, the financial reporting process and corporate governance.

Additionally, the audit committee may also carry out related functions such as supervising the company’s regulatory compliance and business ethics, and developing independent reporting mechanisms that help the company detect and combat fraud and financial irregularities.

As described below, the CMA Rules delineate the functions for an audit committee and the specific responsibilities within each function.

External audit functions include:

• Recommending external auditors and overseeing their terms of engagement, independence, qualifications, and performance; and
• Reviewing the external audit plan and ensuring for the external auditors the accuracy and completeness of, and access to, documentation.

Internal audit functions include:

• Oversight of the internal audit plan and the performance of internal audit function and its efficacy; and
• Monitoring the adequacy of internal control mechanisms by analysing periodic reports generated by the auditors.

Financing reporting functions include:

• Developing a financial reporting system to detect financial irregularities and fraud based on best practices in accounting policies and principles;
• Monitoring any change in accounting policies and any significant departure from international accounting standards or non-compliance with the disclosure requirements prescribed by the CMA;
• Ensuring the accuracy of financial reporting generally and the accounting principles adopted; and
• Reviewing quarterly and annual financial reports and, in particular, the qualifications in the draft reports.

Corporate governance functions include:

• Serving as the liaison among the board of directors, external auditors and internal auditors and financial management;
• Reviewing risk management policies and practices;
• Reviewing proposed related party transactions and making appropriate recommendations to the board; and
• Formulating rules for small value-related party transactions without requiring the prior approval of the board or the audit committee.

Finally, many private companies also have audit committees that perform many of the same functions as public company audit committees. Although the Capital Market Authority’s ‘Rules on the Constitution of Audit Committee’ are not mandatory for companies that are not publicly listed, these rules represent the type of robust audit framework that every company should have to ensure strong and effective internal controls and financial integrity.