Realistic expectations for audit committees.

• Author: Barnette, Curtis H.

It appears that the SEC may view audit committees' roles as much more 'hands-on financial controls' than is feasible or appropriate for outside directors.

The Business Roundtable (BRT) fully supports SEC Chairman Arthur Levitt's statement that qualified, committed, independent, and tough-minded audit committees represent the most reliable guardians of the public interest." We concur that a well-functioning audit committee is critical. The tougher question is what, if anything, can or should be done to achieve this result?

Let me make two general points:

* The BRT believes that the role of the audit committee should be one of oversight of the process and that the audit committee should not be involved in day-to-day management issues.

* No one approach to audit committee effectiveness is necessarily the right approach. Each company, each board, and each audit committee is unique, so any findings must encompass the necessary diversity.

As to the first point, the BRT believes that a good director is one who possesses good judgment and is willing to take on the role of general oversight of the company. To do this well, a director cannot become enmeshed in detailed financial analysis. From our various experiences, we know that an audit committee member's time is better spent ensuring that the internal processes which produce and review financial reports are adequate - rather than trying to conduct a detailed review of these documents themselves. In its 1994 Corporate Director's Guidebook, the Section of Business Law of the American Bar Association (ABA) summed up well this thought by recommending that audit committee members, to the extent practicable, have an understanding of financial reporting and internal control requirements, but "[t]he most important qualifications...remain common sense, general intelligence and independent cast of mind."

Specifically, the BRT believes that the audit committee should provide oversight to the "process," but not be responsible for implementing day-to-day suggestions generated by the internal and external auditors for improvements in the system of internal controls. We support strong audit committees that question both internal and external auditors about reports submitted by them and the accountability and the quality of a company's financial reporting and disclosure. As a best practice, we believe that audit committees should also ask how the company's accounting principles, judgments, and disclosures compare to comparable decisions of similar companies.

It appears that the SEC may view audit committees' roles as much more "hands-on financial controls" than is really feasible or appropriate for outside directors. For example, the SEC's "aircraft carrier" proposal calls for a majority of the board to sign, and certify that they have read, each Form 10Q. This view apparently springs from the...