An audit committee for dynamic times.

• Author: Bromark, Ray
• Position: Chairman's Agenda: Governing for Shareholder Prosperity

The escalating debate on corporate governance is likely to focus even more attention on the pivotal role of audit committees.

Frequent media headlines herald cases of corporate impropriety, management fraud, and the business failures of financial institutions. The public, governmental agencies, and legislative bodies have expressed great concern about issues of corporate accountability. This concern has placed significant demands on corporate management for more disclosure and increased responsibility. Meeting these demands requires a cooperative effort within the entire corporate structure - from the board of directors, to senior management, to all those involved in the financial reporting process.

Audit committees serve as a focal point of this effort, and the responsibilities of audit committee members are increasingly more demanding. Frequent changes in accounting and regulatory requirements, technological advances in accounting and control systems, and enhanced public expectations regarding corporate governance have significantly increased the need for, and role of, audit committees.

A recent proposal by Representative Wyden, "The Financial Fraud Detection and Disclosure Act," is an example of the expansion of audit committee responsibilities due to public expectations regarding corporate governance. If enacted, the proposal would legislate involvement by the audit committee of a public company in the oversight of remedial actions taken in the event that the company committed an illegal act. Further, if an illegal act had a material effect on the financial statements, and the remedial actions were not timely and appropriate, the auditor would be required to "blow the whistle" to the Securities and Exchange Commission.

The escalating debate on corporate governance is also likely to focus even more attention on audit committees as having a pivotal role between the interests of management and shareholders. Audit committees provide oversight of how management is fulfilling its responsibility for full and fair disclosure of financial results. Concepts of what constitutes full and fair disclosure, both within and outside of the formal financial statements, are likely to expand. It is not surprising that more and more companies and regulatory bodies are perceiving the value of audit committees. For example, the 1991 banking reform bill requires each insured depository institution with total assets of $150 million or more to have an independent audit committee made up of outside directors. Relatively recent surveys have shown an increasing number of public companies with audit committees, and there is no reason to expect a change in this trend. Some...