Audit committees step up: Financial Executives Research Foundation (FERF) interviews with audit committee members find that audit committees are more proactive than ever in governing their organizations--regardless of their company's size.

• Author: de Mesa Graziano, Cheryl
• Position: Audit

For a typical audit committee, workload, time commitment and communication with senior management and auditors are on the rise. In the era of Sarbanes-Oxley, audit committees clearly have more responsibility and authority. By hiring experts with accountability to the board, not management, and by selecting, monitoring and overseeing the external auditors, instead of rubber-stamping the process, audit committees are increasingly proactive in fulfilling their fiduciary duties to shareholders.

Though Sarbanes-Oxley and other reforms don't pertain to privately held companies, in order to stay competitive for funding, even committees from private companies are acting, seeking more answers from--and fostering more candid, open relationships with--management and auditors.

In recent interviews with audit committee members and senior financial executives, Financial Executives Research Foundation (FERF) identified common practices for audit committees--the only board committee, notes Barbara Hackman Franklin, current audit committee chair at Dow Chemical Co. and Aetna Inc., that monitors what is done all the time. "Thus, it must do its best to monitor the integrity of both the financial statements and the process that produces them," says Franklin.

Structure and Composition

Under the revised New York Stock Exchange listing standards, audit committees must consist of at least three independent directors who are financially literate. In addition, at least one member must have accounting and financial management expertise, qualifying as an audit committee financial expert as defined by Item 401(e) of Securities and Exchange Commission (SEC) Regulation S-K.

Thomas L. Ringer, who chairs the audit committees of two small- to medium-sized Nasdaq-listed companies, has encouraged his fellow board members to recruit an additional financial expert for one of the companies, since some industry-specific issues can be complicated. Though Ringer himself qualifies as the expert, he feels the company would be better served by having another expert. Ringer expects more rigorous requirements for other companies seeking board members.

Susan F. Schultz, founder of SSA Executive Search and the Board Institute, firms that actively recruit and provide education to board members, agrees that "the [selection] process is becoming proactive, with boards engaging outside professionals to recruit and validate the process to their constituencies. The mandate for and stricter definition of independence, together with the exchanges' recommendation that directors serve on no more than three audit committees, is creating an opportunity to diversify boards."

The audit committee of Arsenal Digital Solutions, a privately held storage management services provider, comprises a member with expertise in due diligence and investment banking and another in emerging growth companies--providing both a backward- and forward-looking view for investors. Though many private companies don't have three audit committee members, they are likely...