On being a successful audit committee chair: five best practices being implemented today.

• Author: Lipman, Frederick D.
• Position: AT YOUR BEST

THE SARBANES-OXLEY ACT of 2002 (SOX) transferred powers from the management of a public company to its independent audit committee. The chair of the audit committee has the important role of providing leadership for the audit committee and of exercising powers on behalf of the committee previously reserved to management. Today, successful audit committee chairs are taking a broader view of their responsibilities beyond the technical legal requirements of SOX or SEC or exchange listing rules and are attempting to follow what are developing as best practices. Some of the best practices being implemented today include the following:

1. Audit Committee Composition. The successful chair should be concerned about the quality and competencies of the audit committee members. We all know about the requirement for a financial expert imposed by exchange listing rules and SEC disclosure requirements. However, it is not necessary, or even desirable, to require that every member of the committee be an accounting expert. Persons with knowledge of the industry and familiarity with company operations can be valuable members even if they are not financial experts, assuming that they have basic accounting knowledge. Moreover, successful audit committee chair are evaluating the contributions of their committee members atleast annually and recommending necessary changes where appropriate.

2. Internal Audit. It is a best practice for the head of the internal audit function to be hired by the audit committee, report directly to the audit committee, and be subject to dismissal by the audit committee. This best practice has, on occasion, created conflicts with management who, under this arrangement, may view the internal auditor as not part of the management team. A successful audit committee chair must anticipate these potential conflicts, devise methods to insure that there is a good rapport between and among the internal auditor, the CFO, and the chief accounting officer, and make certain that all parties understand their respective roles. The audit committee chair should also inquire periodically from the internal auditor as to the adequacy of staffing of the internal audit function. The chair and the internal auditor should exchange cell phone numbers and email addresses.

3. Coordination with Independent Auditor. The chair should have a good working relationship with the partner and manager of the independent auditor so that any problems can be anticipated and...