• Not enough non-executive directors at 34% of biggest AIM companies
• A strong audit committee is seen as vital to enhancing confidence in the integrity of an organisation's processes
A third of the top AIM listed companies need to add extra members to their audit committee in order to meet best practice in corporate governance, shows new research by Edward Drummond, the leading executive search firm.
Edward Drummond says that 34% of the FTSE AIM 100 companies have fewer than three non-executive directors on their audit committee. The Higgs Review and Walker Review which were completed ten years ago, recommended that all listed companies (including AIM companies) have an audit committee of at least three independent non-executive directors.
UK Corporate Governance Code subsequently adopted a lower minimum requirement for AIM companies of two non-executive directors to sit on the audit committee.
Edward Drummond explains that the audit committee is a vital part of the corporate governance system for all listed companies as it is tasked with protecting the integrity of a company's financial statements and performance. The audit committee also has a key role in reviewing the company's internal financial controls and risk management systems and guarding against company fraud.
Neill Fry, Director at Edward Drummond, comments: "It is great news that only 5 of the AIM Top 100 companies fail to meet the standards expected by the UK Corporate Governance rules. But there is clearly more to do with a third of the biggest AIM companies not yet meeting the higher standards set down by the Higgs Review."
Edward Drummond says that although the strength of audit committees at the largest AIM companies has improved greatly over the last few years, investors want to see more financial expertise on audit committees.
Neill Fry explains; "A lot of institutional investors are still put off investing in AIM companies because they worry that is there is not enough breadth of financial expertise on the boards of AIM companies. AIM companies can have a really competent finance director but institutions will want to see that financial expertise mirrored amongst the non-executives as well."
"Many argue that the audit committee is one of the most important elements of what non-executives deliver to AIM companies and it is an area where we are seeing more active recruitment."
"The credit crunch has thrown into the spotlight the integrity and credibility of the financial reporting and performance of many companies – which is why a strong independent audit committee is seen as a cornerstone of a robust business."
Neill Fry comments: "Audit committee members need to understand the financial statements but they also need to be able to challenge the finance director and the external auditors, which is why it's so important that at least one member of the audit committee has significant financial experience."
"At a time when the demands and expectations on audit committees are escalating, it's difficult to see how just one or two directors have the tools to meet all of these functions."