Expanded roles responsibilities and focus: How do you know if your audit committee is complying with the "spirit" of a regulation? Or, will someone "second-guess" your decisions? A national audit firm executive discusses these and other challenges faced by today's audit committees.

• Author: Gazzaway, R. Trent
• Position: Audit Committees

Audit committee members have a part-time job with full-time responsibilities. This notion has become abundantly clear to audit committee members of U.S.-listed companies, as they bear the uncertain weight of regulation. "Uncertain weight" refers to the natural fear of the unknown anytime regulation is introduced, especially when that regulation is intended to re-direct or change the behavior of individuals.

How can you comply with the regulation's presumably right principles while managing the cost and effort of compliance? How do you know if you have complied with the "spirit" of a regulation? What will prevent someone from second-guessing your decisions and actions?

These types of questions weigh heavily on the minds of audit committee members, especially those subject to the requirements of the Sarbanes-Oxley Act of 2002. Looking beyond the fear of and the frustration with the unknown, there are valuable lessons for all audit committee members, regardless of the organization they serve--public or private, for-profit or not-for-profit, U.S.-listed or otherwise.

This author often speaks before groups about audit committee best practices--usually in the context of the Sarbanes-Oxley Act requirements. It is far more helpful, however, to look at the underlying principles that yielded the requirements--for it is there that the universal underpinnings of effective audit committee oversight can be found.

Sections 205 and 301 of the act highlight three key roles for audit committees. First, they are to oversee the accounting and financial reporting processes and the financial statement audits of the companies they serve. Second, they must appoint, compensate and oversee the external auditor. Third, they must establish procedures for the "receipt, retention and treatment of complaints" regarding accounting, internal control or auditing matters; and "the confidential, anonymous submission by employees" regarding questionable accounting or auditing issues.

All this may seem daunting on paper--and, the effort involved is indeed extensive--but the idea is relatively universal that such independent checks and balances should be in place. In essence, every audit committee's role is to stand objectively in the gap between management, the external auditors and the people who provide the capital to make it all happen--the investors, owners and/or donors. They must ensure that those capital providers receive complete, accurate and timely financial information that has been subjected to an appropriate level of scrutiny.

Along those lines, every audit committee should be focused on five key areas:

1. Presence of Appropriate Accounting Skills

   The need has never been greater for organizations to hire or engage accounting skills commensurate with the complexity of their business; and that need increases daily. The flow of business information continues to grow in...