| Summary: | Audit committees play a fundamental role in ensuring the integrity and quality of auditing and reporting procedures. One of the main objectives of requiring audit committees of public-interest entities is to prevent or mitigate the risk of corporate fraud and enhance investor confidence in financial reports, and thereby support the function of securities markets. We examine the composition of audit committees within public-interest entities in Iceland in the context of Icelandic legislation and evaluate the national implementation of the relevant clauses of EU law. Since the introduction of the Icelandic law, different interpretations of the requirement of independence of audit committee members have surfaced. We, however, conclude that the assessment of the independence of committee members is parallel to the conventional assessment of the independence of board members. In particular, Board members can be ruled as independent by the law and can thus serve as the majority of the audit committee. In Iceland the Board of Directors usually assigns one or more non-board members to the audit committee. Such external members now serve in 63 out of 70 audit committees of public-interest entities. This arrangement is not in line with EU law nor legislation in other Nordic countries. In this article we argue that the Icelandic practice undermines the independence of committee members and weakens their mandate. The audit committee should ideally be composed solely of board members, if possible. However, to accommodate those instances when that is not possible, we recommend amending Icelandic law to allow shareholders to directly nominate committee members, in line with EU law. A total of 32 public-interest entities in Iceland do not have an audit committee. Exemptions from the operation of the audit committee should be introduced into law, or the lack thereof clarified, especially for subsidiaries, mutual funds and municipalities. Endurskoðunarnefndir gegna mikilvægu hlutverki í að tryggja áreiðanleika og óhæði ...
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