Magazine article The CPA Journal

Audit Committees' Responsibilities and Liability

Magazine article The CPA Journal

Audit Committees' Responsibilities and Liability

Article excerpt

A strategic position

In Brief

The Audit Committee's New Job Description

In the wake of Enron's collapse, audit committee members are subject to enhanced responsibilities and liabilities, and the SEC and other regulators are conducting more investigations of the actions of directors and officers Nevertheless, serving as an audit committee member can be a rewarding experience and provides an opportunity to make a difference for a public company, its shareholders and the investing public. This article provides a brief history of audit committee their evolving composition, their changing roles and responsibilities, and their enhanced exposure to liability, along with suggestions on how to minmize that liability.

As a result of the shareholder suits, government investigations and criminal proceedings arising from recent financial debates at Enron. WorldCom. and Adelphia, liability is lurking around every corner of the corporate world for directors, officers, outside auditors, and members of audit committees. The discovery of the significant liabilities and insider transactions that Enron and kindred companies hid from their shareholders and the investing public on their financial reports jolted Congress, the White House, the SEC, the major stock exchanges, shareholders and hte public. All of them are scrutinizing companies financial reports for accuracy, integrity, and transparency.

At the core of the financial reporting process is the audit committee of the company's board of directors. Audit committees always have had legal responsibilities under general corporate law, however, after Enron, audit committees have been given significantly increased responsibilities uder the Sarbanes-Oxley Act of 2002. The additional responsibility increases the workload for committee members and in the number of companies seeking qualified persons to serve on audit committees. At the same time, directors and officers liability insurance carriers are advising public companies that there will be higher dedubtibles, lower policy limits, and coinsurnace provisions. all at high premium levels.

While Congress has significantly increased audit committee of their fiduciary duties and violations of of the secruities laws, these are was that audit committee members of an audit themselves. Under section 301 of the Act, members of an audit committee of a board of directors have the authority to "engage independent counsel and other advisers." The Act also mandates that companies pay the fees and expenses of such advisers as determined by the audit committee. This is consistent with the Delaware General Corporation Law which provides that audit committee members, in fulfilling their duties, shall be fully protected in relying in good faith upon independent legal counsel. Audit committee members' concerns can be diminished by conducting appropriate due diligence and retaining competent legal and financial advisers.

The message from Congress and the SEC is that the audit committee is now the gatekeeper of financial information that shareholders and the investing public rely upon in order to make informed investment decisions. The SEC's main objective is to mandate timely disclosure by public companies of all information, financial or otherwise, that would be considered important by a reasonable investor.

History of Audit Committees

Since 1940, the SEC has recognized that an audit committee could serve an important, and ultimately necessary, function in ensuring that a publicly traded company's financial reporting is accurate. In the 1970s, the New York Stock Exchange (NYSE) required boards of directors of listed companies to appoint an audit committee; in the 1980s, the National Association of Securities Dealers (Nasdaq) and American Stock Exchange (AMEX) subsequently followed suit. In February 1999, audit committees received attention when a committee composed of individuals from the NYSE, Nasdaq, public companies, and CPA firms issued the Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (available at www. …

Author Advanced search

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.