The job of the audit committee: getting directors on the same page; FEI's former CEO, who chairs two audit committees, outlines a framework for determining the panel's responsibilities and carrying them out.

• Author: Livingston, Philip
• Position: From where I sit

Continuous improvement has been the rallying cry for audit committees since the 1999 Blue Ribbon Panel on audit committee effectiveness. Since that time, Congress has weighed in on the subject, the New York Stock Exchange (NYSE) and Nasdaq have issued vastly expanded audit committee requirements, the National Association of Corporate Directors has published its own audit committee guide and countless conferences and symposiums have occurred.

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In the field, audit committee skepticism is up, meetings are longer and the agenda items are considered more intently. Yet, there is still a need for more director education and dialogue. Most companies need a better understanding between the directors, management team and the auditor as to the mission and workflow of the audit committee. Like a championship sports team, the objective must be clear and the communications have to be frequent.

What's the overall purpose of the audit committee? It's not to oversee everything related to finance, and it's definitely not to drive down the auditor's fee--probably the most common unstated agenda prior to the recent reforms. The purpose and authority of the committee comes from the board in the form of the committee charter. The board delegates certain functions to its committees, and the audit committee's key responsibilities are to:

* Oversee the company's financial reporting to its stakeholders

* Promote an effective independent audit of the financial statements

* Oversee the system of internal control

* Monitor the process of risk identification and management

Let's talk about each of these points and bring them into practical focus.

1) Financial Reporting -- Overseeing financial reporting is really about cutting through the complexity of accounting and making sure that the enterprise's performance is clearly communicated. Are the statements readable and useful? Many investors today focus on the management discussion and analysis. They expect, and should get, a good summary of the same important business trends and concerns that come out in boardroom discussions.

Inherently, financial statements require many judgments, accounting principle choices and valuation estimates. The committee should be made aware of the choices that management has made in compiling the financial reports. Aggressive application of accounting principles should be discouraged, and the use of reasonable estimates encouraged. A recent and valuable requirement of...