A workable audit committee charter.

• Author: FERRARA, RALPH C.
• Position: Brief Article

A sound charter for the audit committee should serve to protect a company and its board.

IN AN EARLIER COLUMN, we promised to discuss the development of meaningful audit committee charters in the wake of new Securities and Exchange Commission rules regarding audit committees. True to our word, we have drafted models that are both workable and responsive to applicable requirements and, in so doing, composed the following list of safeguard considerations.

Relevant Requirements. The new rules require that the annual proxy statement include a report from the committee naming each member and stating whether it reviewed the audited financial statements and discussed them with management, addressed financial reporting process and independence issues with the auditors, and recommended that the board include the audited financial statements in the company's annual report.

In adopting these rules, the SEC also encouraged (but did not require) reporting companies to adopt charters for their audit committees. Rather, the agency's rules require disclosure in the proxy regarding whether the committee is governed by a charter and, if so, inclusion of the charter in the proxy at least once every three years. Understand, however, that creating such governance records is hardly optional. Ensuing NYSE, Nasdaq and Amex rules now require their listed companies to adopt committee charters meeting certain minimum specifications.

Best Practice. Even if required to adopt such charters, public companies should come to embrace their protective merits. As the SEC correctly noted, "audit committees that have their responsibilities set forth in a written charter are more likely to play an effective role in overseeing the company's financial reports."

Taking that guidance to heart, many companies now provide committee members with supplemental procedural guidance (checklists, calendars, etc.) on how to monitor the company's financial reporting process and follow the SEC's new rules to make these efforts more effective and minimize subsequent cause for concern. In following that course, however, companies must exercise great care in drafting documents and setting normative standards for director behavior that may broaden the record upon which future plaintiffs may rely in claiming some failure by the audit committee to discharge its now more varied array of duties. In establishing any code of conduct, a company or committee must be committed to following it.

Practical...