The audit committee under examination: a spotlight on the audit committee's ever-growing challenges, evolving composition, and emerging best practices.

• Author: Daniels, Thomas T.
• Position: SPENCER STUART GOVERNANCE LETTER

EARLIER THIS YEAR, Spencer Stuart's Financial Officer Practice explored the impact of the regulatory and legislative changes that have expanded the role and influence of public company audit committees. The study, Global Fifty: Perspectives of Leading Audit Committee Chairs, was the product of in-depth conversations with dozens of experienced audit committee chairs in Europe and North America and a quantitative survey. It looked at how changing regulatory requirements have affected the functioning and composition of the audit committee, the changes in and obstacles to director recruitment, and the best practices that are emerging among some of the most respected global companies.

Here are some of the observations that emerged from these conversations:

* New regulatory requirements and market expectations have raised the profile of the audit committee and broadened its responsibilities, dramatically increasing the time required for audit committee service.

* Audit committees are meeting more often and for longer periods. Committee work typically requires much more preparation and communication in between meetings. One-third of the audit chairs included in our survey said they spend 130 hours or more a year on committee work--not surprising when you consider that nearly half said they spend at least four hours to prepare for each audit committee meeting. Forty percent said the audit committee meets at least 11 times a year.

* The new regulatory, governance, and risk management environment has had a dramatic effect on the relationships between the audit committee and other players, including senior management, the internal audit function, and the external auditor. Audit committees today exert much more influence over the external auditor than in the past. They play a more central role in hiring the auditing firm and establishing the scope of the audit.

* The profile of the audit committee is evolving. In the immediate aftermath of the passage of Sarbanes-Oxley, many boards rushed to add financial experts to their ranks. Beyond meeting the financial expert requirement, directors have become more conscious of maintaining an audit committee with a complementary mix of skills and experience.

* Recruiting new directors to serve on the audit committee has been an ongoing need for most boards during the past few years, and will continue to be for the foreseeable future. More than 45 percent of the audit chairs we interviewed said at least half of their audit committee has turned over during the past three years; 30 percent said they expect that half of the audit committee membership will turn over during the next two years.

* Board candidates today typically want to review a company's director and officer liability coverage before agreeing to accept a new board assignment. Candidates are...