Audit Committee Membership? Expect to be Busy

Members of the audit committee must be prepared to spend a substantial amount of time in discharging their duties and obligations in relation to the company.  For example, commentators are advising that audit committees should schedule full-day meetings on no less than a quarterly basis.  The schedule for the meetings should allow sufficient time to review earnings releases and proposed 10-Q filings.  The chairperson of the audit committee plays a key role in ensuring that the time of the committee members is invested wisely and efficiently and he or she needs to be prepared to work on the committee agenda to make sure that meetings run smoothly and coordinate with other committees, such as the compliance and risk management committee and the disclosure and reporting committee, to avoid unnecessary waste of effort through duplication.  The committee chairperson should also have a good understanding of the business, its risks, and controls; be professionally skeptical and possess integrity and confidence; have strong communication and interpersonal skills; and prepared and willing to set aside large amount of time to overseeing the committee’s agenda and projects and meeting with management, other board members, the independent auditors, members of the internal audit function and representatives of key stakeholders.

At each meeting, members should be prepared to engage in lengthy and detailed discussions with senior management, as well as the company’s internal and external auditors, to understand the financial reporting system of the company and the decisions that are to be made relating to the accounting treatment of various transactions.  Under no circumstances can any of the audit committee members fail to achieve a clear understanding of any transaction, the manner in which it is presented, and the economic effect it will have on the financial position of the company.  Audit committee members should be able to review and evaluate the results that would have been reached if alternative accounting methods had been elected.

In addition, the audit committee should schedule extra time to allow for discussion of all financial information and other disclosures that are to be made in response to regulatory requirements, including financial statements, press releases and earnings guidance and other financial information given to analysts and rating agencies.  Discussions with the company’s independent auditors are particularly important in this process, especially given the oversight responsibilities now vested in the members of the audit committee.  The auditors should be quizzed about the procedures and decisions that they themselves might have used or made had they been given complete authority over the preparation of the company’s financial statements.  This inquiry is designed to focus on differences from the approach taken by management toward the reporting process.  The auditor should also be asked to put itself in the shoes of senior management and opine as to whether or not the auditor believes the company’s internal controls are sufficient for the auditor to be comfortable in delivering the certifications required of senior managers.  Finally, the auditor should be asked whether it would be satisfied with the financial information provided by the company if it were an investor.

Given the time required by audit committee members to complete the necessary consultations, it is more important than ever that audit committee meetings and activities be carefully scheduled.  This requires proper advance planning for meetings, including timely dissemination of the materials to be discussed at the meeting, and sufficient time during the meetings to accomplish all the work that needs to be done.  In addition, audit committee members must anticipate the need to devote additional time for follow up on questions and issues that arise at the meetings.  All of this means that each prospective audit committee member should evaluate carefully the existing demands on his or her time before accepting this important assignment and the Commentary to the NYSE listing standards actually includes conditions that must be satisfied before an audit committee member will be allowed to simultaneously serve on the audit committees of more than three public companies.  Audit committee members should also expected to be tapped for assignment to other board-level committees that handle topics that overlap with the traditional responsibilities of the audit committee in order to ensure that there is effective coordination and collaboration between those committees.  For example, audit committee members are good candidates for service on the board’s compliance and risk management and disclosure and reporting committees.

Given the broad array of duties and responsibilities that have been vested with the audit committee, and the corresponding need for interpretation of applicable rules and regulations, it is not surprising to find that the audit committee will often require focused advice from independent counsel.  Recognizing this need, SEC rules now provide the audit committee with authority, as discussed above, to engage independent counsel and any other advisers the committee determines may be necessary in order for it to carry out its duties and obligations.  For example, it can be expected that counsel will be consulted for interpretation of basic issues, such as whether a nominee for the audit committee is “independent” or whether a particular service provided by an accounting firm falls within the scope of the audit committee’s approval requirements.  Counsel will also be required to assist the audit committee in the development of rules and procedures, including written charters that must be developed to define the scope of audit committee activities.  Finally, counsel will be required to assist the committee in overseeing and conducting internal investigations that may be brought to the attention of the committee through the professional standards requirements imposed on attorneys..

This article is adapted from material in Sustainability and Corporate Governance: A Handbook for Sustainable Entrepreneurs, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be downloaded here.

Alan Gutterman is the Founding Director of the Sustainable Entrepreneurship Project, which engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the aspiration to create sustainable enterprises that achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business.  Visit the Project’s Library of Resources for Sustainable Entrepreneurs to download handbooks, guides, articles and other materials relating to sustainable entrepreneurship and keep up with the Project’s activities by following Alan on LinkedInTwitter and Facebook.

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