Status check: three years after SOX, effectiveness of audit committees is a mixed bag.

• Author: Herrerias, Paul
• Position: AUDIT COMMITTEES - Sarbanes-Oxley Act of 2002

Three years ago, the executive search world was abuzz with the anticipated business search firms would receive from audit committee chairs and members looking for the prized "financial expert" as required by the newly enacted Sarbanes-Oxley Act, specifically Sec. 407.

As it turned out, Sec. 404, which requires an issuer's annual report to contain an internal control report signed off on by the external auditor, has drawn the most attention--and dollars--from public companies. And search firms have been left without the forecasted spike in hiring of such financial experts.

Why? Exhausted from meeting rigorous Sec. 404 demands, most board chairs and CEOs simply plucked a financial expert from their existing board of directors or a friend with financial expertise to sit on the audit committee.

So, how well are audit committees working and where do they need to improve?

A MIXED BAG

To help answer these questions, we interviewed several stakeholders, including audit committee members. The results indicated that audit committee effectiveness has been a mixed bag, with some SOX provisions proving to be bigger hurdles than others.

Some of the more harrowing challenges include measuring the effectiveness of internal and external auditors; ensuring a corporate code of ethics; appointing qualified and independent committee members; ensuring the integrity of financial statements; and providing for effective feedback from stakeholders.

As new rounds of accelerated filers grapple with Sec. 404 compliance, several lessons are becoming clear--chief among them is the interplay between management and the audit committee.

EFFECTIVENESS

The increased regulatory emphasis on audit committees can highlight or even exacerbate schisms between the committee and management. But the increased regulatory focus can have a silver lining: audit committee process improvements.

SAS 61, which regulates communications between the outside CPA firm and the audit committee, has had more impact on the effectiveness of audit committees than SOX, according to Bill LeRoy, a partner at BDO Seidman.

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Prior to SAS 61, only the unresolved issues had to be reported; now all significant accounting issues for the period are discussed with the audit committee including how they were accounted for and how the preferred accounting treatment was determined.

This has empowered and emboldened auditors, giving them leverage they had lacked before management, and ultimately...