The Audit Committee

The Audit Committee

The Audit Committee has become increasingly important in the audit procedure of public companies. Especially with some of the more recent corporate scandals, the audit committee is now a requirement for public companies rather than an option. The encouragement for the use of an audit committee is not new to the world of corporate governance. This has been a recommendation of financial law makers since the late 1930s. Support for the use of audit committees continued to grow in the 1970s, and more public companies considered the audit committees to be an asset to their companies and their investors. Even though there was growing support for the audit committees, nothing quite brought about the need for official standards for the audit committee like recent corporate failures (e.g. Tyco, WorldCom, Enron, etc.). These failures damaged reputations and the economy and it also jeopardized the investments of stakeholders. The Sarbanes Oxley Act of 2002 was the government's attempt to stimulate the economy and regain the confidence of stakeholders. Public companies were now required to take more responsibility for their actions and one of the ways to this would be to employ the use of an audit committee.

The Sarbanes Oxley Act §205 explicitly defines and audit committee as "a committee established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of financial statements of the issuer". Overseeing financial statements and fairly assessing them requires a great deal of independence on the part of the audit committee. If there is financial or personal interest this will affect its objectivity. §10A of the Exchange Act serves as a reference to public companies as to what that true independence means. One of the criterions of independence, according to the act, is the absence of compensation. Compensation increases the director's interest in the company and jeopardizes their independence. The other criterion is related to the relationship a committee member has with related parties of the public company. Independence is only the first step the audit committee must take to fulfill their obligations.

The audit committee is responsible for overseeing the financial process of the company on whose board they serve. To effectively oversee the financial reporting process there must be communication among the external auditor, the internal auditors, management and the audit committee. They must review the financial statements quarterly and annually and then discuss their findings with management. This makes it important for the members of the audit committee to have subsequent knowledge of accounting procedures and policies. The audit committee will be able to communicate to management whether their practices concerning their financial statements are compliant with the law; if they are not, then it is the duty of the committee to carry out formal investigations about the company's deviations from the law. In addition to gathering evidence of deviations from financial statement the committee