Where Was The Audit Committee?

• Author: Pearson, Mark W.

In the last few years, interest in the roles and responsibilities of the audit committee has increased. It's widely believed that new practices would have gone a long way toward preventing the financial reporting abuses of the past.

"Where was the auditor?" It's a question often asked by investors and others in the wake of allegations of fraudulent financial statements or a restatement of reported financial results. Now, as the role of the audit committee expands, investors are also wondering, "Where was the audit committee?" Is your audit committee prepared to answer?

In the last few years, the roles and responsibilities of the audit committee have been of interest to investors, legislators, regulators and the general public -- largely due to concern over several factors: a number of highly publicized cases of alleged fraudulent financial reporting that were costly to investors; errors requiring restatements of financial statements; the use of acceptable, but aggressive accounting principles; and "earnings management" practices to achieve desired financial results.

In response to this increased attention, a number of commissions and committees -- consisting of corporate executives, accounting and auditing practitioners, academics, regulators and others -- were formed to study the appropriate role of the audit committee. From these studies, new requirements and recommendations have emerged, resulting in audit committees taking a more proactive role in the oversight of financial reporting.

It's widely believed that the new practices would have gone a long way toward preventing the financial reporting abuses of the past. Thus, the following explores the practices and how they might improve the financial reporting process.

What Has Changed?

Recent significant activities of a number of groups assisting to enhance the effectiveness of audit committees include:

* The issuance in 1999 of the "Report of The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees" (known as the Blue Ribbon Committee), sponsored by the New York Stock Exchange and the National Association of Securities Dealers (NASD). The report contains 10 recommendations for improving audit committees' performance. The report stresses that audit committee members need to be independent, possess financial literacy and recognize the significance of their responsibilities by devoting the appropriate amount of time to their tasks. The Blue Ribbon Committee...