Risk & Compliance

It’s Time to Get Serious About Audit Committees

Are you up on all the new rules and deadlines governing the operation and membership of your audit committee?
Ed ZwirnDecember 21, 2000

Leland Graul recalls the time not too long ago when he nearly lost it.

The BDO Seidman partner was meeting with chiefs of a Fortune 1000 client in order to review procedures for the firm’s audit.

“‘As chairman of the audit committee, do I have to read the Form 10-K?’” he remembers being asked. “I bit my cheek, I dug my nails into the palm of my hand… it was everything I could do to avoid saying something that could have gotten me fired.”

But audit committee members had better be prepared to do a lot more homework going forward, given the host of new rules being phased in by the Securities and Exchange Commission.

Two sets of SEC rules promise to put the heat on audit committees, and possibly complicate the task of recruiting audit committee members. See “Audit Committees Face SEC Heat”

The first of these, passed in December 1999, specifies requirements for committee charters, and more closely regulates committee composition and membership requirements.

In addition, on Nov. 15, the SEC passed a set of regulations see related news article putting much of the onus for ensuring the independence of outside auditors with the committees. see complete text of the SEC auditor independence rules The new rules, which were the product of a major SEC compromise with the Big 5 accounting firms, require that audit committees state that they have considered whether the provision of non-audit services such as IT consulting by outside auditors “is compatible with maintaining auditor independence.”

The original SEC proposal would have banned much of this activity outright, costing accounting firms a significant portion of their revenues.

At a recent program hosted by the SEC Institute in New York City, Graul, who also serves as BDO’s National SEC Director, said that there are many dates to keep in mind.

Key Deadlines Past and Future Some of these dates (see below) have already passed:

  • Quarterly financial statements are required to be reviewed for all fiscal quarters ending after March 15, 2000.
  • As of June 14, 2000, audit committees should have adopted formal written charters for complying with the new regulations.

Other dates, however, are pending:

  • Feb. 5, 2001–New proxy disclosure requirements driven by the auditor independence rules go into effect.
  • Feb. 5, 2001–Rules governing the provision for non-audit services go into effect, albeit with an 18-month transition period. In addition, rules governing the independence of outside audit staff and audit committee members themselves, go into effect for most firms.
  • June 14, 2001–The new rules governing audit committee structure and membership requirements go into operation. Among the provisions, committees must contain at least three independent directors, all committee members must now, “or soon,” be able to read and understand major fundamental financial statements, such as balance sheets and income statements, and at least one member must have had past experience in finance or accounting, or certification in one of those fields.

The above list is albeit an oversimplification, and there are always exceptions.

But CFOs, board members and other top managers of firms are well advised to begin preparing for the changes, if they have not already done so.

In this regard, it pays to talk to your outside auditor. Afterall, auditing firms have been involved with much of this rulemaking from the beginning, in many cases if only to aggressively fight against them.

No More Rubber Stamps

Kenneth E. Dakdduk, a partner at PricewaterhouseCoopers, echoed much of the discussion when he urged managers to set up audit committees with real power and independence.

“We don’t need rubber stamp auditors,” he told conference participants. “You’ve really got to start working.”

“We need [audit committee] members that will put your feet to the fire,” he added.

The new bottom line for auditors: “Don’t think about who signs your check–Think about who uses the information in your report,” he said.

For more information, see:

The SEC Rules on Auditor Independence

Restatement Blues

Audit Committees Face SEC Heat