Understanding the changing role of the audit committee.

• Author: Roach, Gerald F.

In the wake of Enron and other corporate misconduct, Congress perceived that major systemic problems existed within corporate America. In July 2002, Congress offered its solution through the enactment of the Sarbanes-Oxley Act of 2002. The Securities and Exchange Commission was charged with rule making on the act. The major stock exchanges and stock associations followed the SEC'S lead with rulemaking agendas of their own. One specific focus of these legislative and regulatory initiatives is the public company's audit committee. As a result, directors serving on public-company audit committees are in the spotlight, with increasing scrutiny of the role they play within a corporation.

Many audit committee members are concerned that the act and the SEC's and the self-regulatory organizations' rule making fundamentally will change the role of a public company's audit committee. Others believe, however, that to comply with the new requirements they must only formalize existing practice, such as through amending audit committee charters or adopting other written procedures. In light of these recent developments, the time is right for a corporation's board of directors to reassess the role of its audit committee within the corporate structure and consider any changes to the audit committee's composition, practices and procedures to better comply with the act and its rules.

An audit committee's role within a corporation is to be a proactive corporate watchdog: supervising and questioning the outside and internal auditors and senior management, encouraging procedures that promote accountability among these players, ensuring the proper development of internal controls and overseeing the outside auditor's review and assessment of the corporation's financial practices. But this does not mean that the audit committee is responsible for doing the job of the outside auditor, the internal auditor or the chief financial officer or for guaranteeing the accuracy or quality of a corporation's financial statements.

Better-prepared, more-independent boards

A primary area for change in the audit committee is its composition. Audit committee members will have to meet a new standard of independence and be prepared to devote the time needed for their service. They must have sufficient knowledge concerning the corporation and the industries in which it operates to analyze its controls and other financial-reporting processes, financial statements and public...