Audit committees bracing for shakeup.

• Author: Sweeney, Paul
• Position: Working with Boards

Sun Microsystems' board of directors recently appointed two high-profile professionals to its audit committee. In the process, Sun could well be setting the gold standard for Corporate America.

On Sept. 30, the Santa Clara, Calif-based high technology company, best known for its computer workstations and its Java language, named Lynn Turner -- the former chief accountant at the Securities and Exchange Commission and a fierce critic of many current accounting practices -- to its board. At the same time, Sun appointed its former chief financial officer, Michael Lehman, to serve alongside Turner.

"It's a gutsy move," says Patrick McGurn, vice president and special counsel at Institutional Shareholder Services, a consulting firm in Rockville, Md., that advises large institutional investors on corporate governance issues. Citing in particular the appointment of Turner, who is now an accounting professor at Cob orado State University and director of the college's Center for Quality Financial Reporting, McGurn remarked: "Talk about getting an independent person on the audit committee!"

Even hardened skeptics like McGurn admit that they are witnessing instances of positive, if gradual, changes in corporate governance emerging in the months following the Enron debacle and a raft of other corporate accounting scandals -- scandals in which Corporate America's boards of directors often failed to provide effective leadership. Audit committee ineptitude, in particular, is generally acknowledged to be among the principal reasons why shareholders suffered billions of dollars in losses over the last year or so.

"Audit committees have not been the vigilant, active overseer they are supposed to be," says former University of Texas accounting professor Dan Guy, co-author of a book on audit committees and a frequent expert witness in complex financial litigation. "They haven't asked the right questions."

That realization has made audit committees an important focus of legislative, regulatory and institutional reforms. Spurred on by defrauded investors and an outraged public, the leading stock exchanges, the Securities and Exchange Commission and Congress are all insisting that audit committees exhibit higher standards of ethics, greater independence and competence.

Amidst the welter of reforms, audit committee members will now be required to be fully independent of a company and its management. That means that they cannot be on the company payroll, represent a customer or law firm with ties to the business, or be a family member or relative; their only form of compensation should be directors' fees. "The problem has been...