Some Were Omitted


New Rules, New Responsibilities” ( JofA, Aug.00, page 53) deals with questions arising from only some of the important new audit committee rules resulting from the SEC’s “blue ribbon committee” initiative. There are other rules companies might need to consider.

For example, the article omits discussion of the newly articulated audit committee responsibility to actively monitor auditor independence. The New York Stock Exchange rule requires the audit committee to recommend that a company’s board of directors “satisfy itself of the outside auditors’ independence.” The National Association of Security Dealers’ rule on this issue is even more nebulous, requiring the audit committee to take, or recommend that the full board take, appropriate action to “oversee the independence of the outside auditor.” Either of these requirements raises questions of implementation and compliance risk for audit committees.

Absent as well is consideration of the implications of the new directive that the outside auditor be accountable to the audit committee rather than management. Specifically, this involves a new responsibility for audit committees to “select, evaluate and, where appropriate, replace the outside auditor.” There does not appear to be widespread understanding of the appropriate methodology or criteria that should be used for such evaluations or replacements.

Emphasis on audit committee warranties is appropriate, particularly agreement that the financial statements comply with GAAP and are appropriate for filing with the SEC. However, the discussion should have covered the requirement for annual confirmation of various matters. These include audit committee review and reassessment of the adequacy of its charter, the independence and financial literacy of all members and the accounting or financial management expertise of one. The NYSE has developed a formal written affirmation for this purpose.

Curtis C. Verschoor,
Ledger & Quill Research Professor
School of Accountancy
DePaul University


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