The Audit Committee Revisited
By John Stuart , Reitner, Stuart & Moore
It is apropos that, as this column is being written, the two highest profile figures in the Enron scandal are coming to trial on criminal charges. Some time now has passed since management, directors, accountants and counsel devised new audit committee charters and policies in response to this financial scandal and its progeny - the Sarbanes-Oxley Act and the various corporate governance stock exchange rules. As we head into another yearly cycle for the committee, it is appropriate to revisit what we have done and whether, after some experience and reflection, there are things that ought to be changed.
The increased responsibilities of the Audit Committee include review of quarterly earnings and financial statements, assuring the adequacy of internal controls and monitoring the retention and performance of internal and external auditors. However, many companies also overburdened the committee with tasks, such as approving insider transactions and monitoring the code of ethics, which in retrospect might have been better assigned to other committees. Often the independent directors on the committee are being overworked in relation to their peers and there ought to be some reduction in responsibilities to more equitably distribute all the governance tasks among the board’s committees.
As you and counsel revisit the charter to determine if the duties of the committee can be trimmed, review your entire charter and make sure it properly reflects your company’s practices. Many charters were “cribbed” from those of much larger institutions in order to get something in place. Do the words really match what your committee is doing? If not, take some time to correctly document your practices.
Additionally, take a look at what your charter says about the relationship between the committee and the internal audit function. Most of us were brought up on the notion that “best practices” was for the committee to have oversight responsibility of internal audit. However, the line may be blurring. At a recent accounting program, one speaker suggested that the internal audit function should be under the direct control and supervision of the audit committee - i.e., internal audit works for the committee. Check with your accountant and your internal auditor for their thoughts.
Another practice which might have found its way into your committee documents is self-evaluation requirements. While annual self-evaluation of board and committee performance is probably a positive trend in the area of corporate governance, members must be conscious of the fact that any disclosures or statements made during the course of evaluation are discoverable materials in the event of litigation and, to the extent included in minutes, probably available for inspection by interested shareholders. Also, don’t forget the other constituency that gets to read everything - the bank examiners. For this reason members, while striving to raise issues of concern, should attempt to tailor their written responses in such a way that confidential materials are not disclosed in writing. Such issues of concern may be thoroughly discussed in closed session and reflected, to the extent necessary, in carefully prepared meeting minutes.
A great deal of attention has been focused on identifying and documenting an “audit committee financial expert” but, in the emerging regulatory climate, it is also very important who chairs the committee. Increasingly, the chair of the committee is being asked to meet with regulators and examiners as well as being the focus of shareholder questioning. The P.R. savvy required for those jobs might not be coextensive with the skill set of the audit committee financial expert.
Finally, as the committee undertakes its review of the external audit engagement letter this year, remember to take into account the federal bank regulators’ joint release of Feb. 3, 2006 detailing unsafe and unsound provisions in such engagement letters, including provisions that indemnify or hold harmless the external auditor against client or third-party claims and that limit the remedies available to the client financial institution.