EXECUTIVE
SUMMARY | WITH THE ADVENT OF
SARBANES-OXLEY, CPAs ARE LIKELY
to receive more invitations to
serve on the audit committees of corporate
boards of directors. Before accepting
these offers, accountants should make sure
they are ready for the time commitment and
other responsibilities that come along
with them.
MANY CPAs WILL BE
ASKED TO SERVE AS THE AUDIT
committee’s financial expert.
This individual should have an
understanding of GAAP and financial
statements, experience preparing,
auditing, analyzing or evaluating
statements that show a level of
complexity similar to the company’s and
an understanding of internal controls,
financial reporting procedures and audit
committee functions.
INDUSTRY EXPERTISE
IS AN IMPORTANT QUALIFICATION
for audit committee service.
For certain specialized industries CPAs
may need to devote extra time to gain a
working understanding of the business
and its competitors.
SERVING ON AN AUDIT
COMMITTEE INVOLVES a
significant time commitment, including
preparing for meetings as well as
attending them. Preparation time depends
on the responsibilities in the audit
committee’s charter and the resources
available to help it do its job.
BEFORE MAKING A
FINAL DECISION TO JOIN an
audit committee, CPAs should be sure to
read the sections of Sarbanes-Oxley
pertaining to audit committees as well
as the company’s audit committee
charter, speak to current and former
committee members and evaluate their own
independence from the company and its
management. | STEPHEN A. SCARPATI, CPA, CLU,
ChFC, is a senior managing partner at 180
Management in New York City. He heads the
firm’s audit committee advisory service.
His e-mail address is
stephen.scarpati@worldnet.att.net .
|
orporate America is only beginning
to feel the impact of the Sarbanes-Oxley Act of
2002. Not surprisingly, one consequence of this
legislation is that CPAs, particularly those who
are retired from public practice or those in
industry, are often sought after to serve on
boards of directors of both public and private
companies. It is particularly critical for the
long-term economic confidence of the nation that
American businesses attract and retain talented
individuals to serve on their boards’ audit
committees. Now that the SEC has issued its
definition of “audit committee financial expert,”
even more companies are seeking CPAs as board
members. Serving on an audit committee can
be professionally rewarding. For many accountants,
it provides an opportunity to contribute a
lifetime of experience in a challenging new
business environment. Many CPAs find the
intellectual interaction with other corporate
leaders to be a pleasant addition to their
careers. This experience, however, is not
universal. For some, the benefits do not justify
the personal commitment, media spotlight and legal
liability that potentially accompany audit
committee service. A few have resigned their
positions while others simply do not accept offers
to serve. This article outlines some key factors
and practical issues CPAs contemplating service on
an audit committee should consider before joining.
In addition, “ Six Points to
Ponder When Invited to Join an Audit Committee
” offers guidance from CPAs who serve on
corporate boards and their insights into the
decision of whether to join a board and its audit
committee.
AUDIT COMMITTEE FINANCIAL EXPERT
SEC rules
implementing section 407 of Sarbanes-Oxley require
a company to disclose whether it has at least one
“financial expert” serving on its audit committee
and, if so, the expert’s name and whether he or
she is independent of management. A company that
does not have such an expert on its audit
committee must disclose this fact and explain why.
It
makes sense that corporate America would
look to CPAs to satisfy this new
requirement because the SEC defines a
financial expert as someone with
An understanding of GAAP
and financial statements.
The ability to assess the
general application of these principles
in connection with accounting for
estimates, accruals and reserves.
Experience preparing,
auditing, analyzing or evaluating
financial statements that present a
breadth and level of complexity of
accounting issues that are generally
comparable with the breadth and
complexity of issues the company’s
financial statements might reasonably
raise or experience actively supervising
one or more persons engaged in such
activities. |
Directors and
Ethics
Some
81%
of companies have
conducted ethics and
compliance training for
their employees.
Only
27%
have held any such
training sessions for their
boards of directors.
About
55%
of the executives
surveyed say their directors
are not engaged enough in
major ethical issues
involving the company.
Source:
Conference Board survey of
ethics, human resources and
legal officers,
www.conference-board.org
.
| |
An understanding of internal controls
and financial reporting procedures.
An understanding of audit committee
functions. Under SEC rules, a person must
have acquired these attributes by any one or more
of the following means:
Education and experience as a
principal financial officer, principal accounting
officer, controller, public accountant or auditor.
Experience actively supervising one
of the above or someone performing similar
functions.
Experience overseeing or assessing
the performance of companies or public accountants
regarding the preparation, auditing or evaluation
of financial statements.
Other relevant experience.
CPAs in both public practice and industry
typically have these attributes and qualify as
audit committee financial experts. However, CPAs
need to consider a number of other issues and
factors when contemplating an offer to serve on an
audit committee.
INDUSTRY EXPERTISE
By design,
board members frequently are drawn from a
wide spectrum of industries and
professions. This diversity adds valuable
perspective when assessing corporate
strategy, overseeing management and
evaluating operating performance. New
members without the requisite industry
background must devote extra time and
effort to gain a working understanding of
that business. Certain industries,
however, have higher degrees of
specialization, uniqueness or regulation
than others, and the “learning curve”
could be considerably longer. For more
specialized industries, audit committee
members in particular often need to
devote extra time to understanding the
financial implications of a company’s
circumstances. Take, for example, the
insurance industry. All insurance
company audit committee members need to
understand issues such as
Statutory accounting.
Prescribed by the National
Association of Insurance Commissioners,
this method of accounting differs
significantly from GAAP.
State regulation.
These rules are unique to each of
the 50 states. Most insurance companies
typically do business in multiple
states.
Actuarial
considerations. The methods and
assumptions actuaries use for pricing
and reserve valuation criteria.
TIME COMMITMENT
For many
CPAs, the amount of time required to
effectively serve is the primary
consideration in deciding whether to
accept an audit committee assignment.
Three major factors—the committee
charter, meeting preparation and
available resources—influence the time
commitment. |
Audit
Committee/Director Resources
The AICPA has
created an “audit committee
matching system” (ACMS) for
members who are interested in
serving on the audit committee
or board of directors of a
public, private,
not-for-profit or
public-interest entity. AICPA
members can register with the
ACMS at
www.aicpa.org .
Organizations looking for
audit committee members will
be able to visit the ACMS and
search for candidates. Both
parties are responsible for
their own due diligence.
The AICPA is also creating
an audit committee tool kit,
including forms and
checklists, to help make a
committee actionable. The kit
will be available late in the
third quarter or early in the
fourth quarter of 2003. Its
availability will be announced
through The CPA Letter
and the AICPA Weekly
Update and other means.
The kit will be supported by a
Web site within
www.aicpa.org called the
Center for Audit Committee
Effectiveness. All tools will
be downloadable from the Web
site, and users are encouraged
to tailor them to their own
needs. In early 2004
the AICPA also expects to
launch an audit committee
competency model within the
AICPA Competency
Self-Assessment Tool. The
model will allow audit
committee members, and those
in the organization that work
closely with them, to assess
their skills—an important step
in understanding the
committee’s effectiveness.
| |
Audit committee charter. This document
sets out the group’s responsibilities, authority
and specific duties. Typically, an audit committee
oversees and monitors a company’s financial
accounting and reporting process, its internal
controls system and the external audit process.
It’s quite possible members may have other
responsibilities as well. The biggest variable in
establishing the extent of audit committee
oversight is whether other board committees exist
to handle related financial matters. For example
many boards of directors have a finance committee,
which exercises general oversight over the
company’s financial programs. Certain financial
services institutions also may have a committee to
supervise investment policies and procedures. The
absence of such committees may add to the audit
committee’s workload and increase the time
commitment of its members.
Preparation. An audit committee typically
meets between four and eight times a year. The
actual time attending these meetings usually is
dwarfed by the time a member must spend to prepare
for them. A common boardroom debate revolves
around the volume and level of detail of
information and materials management provides to
committee members prior to meetings. Not long ago
a six-member audit committee at one large company
debated the issue, with three members wanting to
reduce the level of detail from management and the
other three asking for more. While this might seem
unusual, it highlights the fact that a review of
financial statements, independent accountant
communications, internal audit reports, management
reports and correspondence all take place before
the meeting and require considerable preparation
time. Conscientious members arrive at audit
committee meetings prepared to address key issues
and to ask the right questions.
Resources. Section 301 of Sarbanes-Oxley
specifically addresses the issue of audit
committee resources. It says, “Each audit
committee shall have the authority to engage
independent counsel or other advisors, as it
determines necessary to carry out its duties.”
That section also says, “Each issuer shall provide
appropriate funding to the audit committee.”
Not every audit committee has the time, skills
and experience to handle every problem that comes
its way, particularly if the company faces
unusual, difficult or contentious issues.
Increasingly, proactive audit committees are
augmenting their collective member expertise by:
Obtaining training and education on
current issues affecting the company.
Engaging their own industry and
financial experts.
Hiring legal counsel for the
committee. As committees strive to assess
risk, determine the adequacy of controls and
understand key business drivers, they often seek
outside advice to ensure they are asking the right
questions. Not only does this provide important
incremental expertise, it also eases the burden on
individual committee members who might otherwise
have to devote extra time and effort on their own.
LEADERSHIP
Many CPAs will be
asked to serve as the audit committee financial
expert. By virtue of their financial skills,
acumen, training and background, CPAs are in an
excellent position to grasp key issues quickly and
make leadership contributions to audit committees.
This also could include serving as committee
chair. In this role, CPAs would have additional
responsibilities, the most significant being
setting the group’s agenda. Establishing
the committee agenda requires considerable
judgment. After consulting with senior management,
other audit committee members, board members, the
internal audit director, the independent audit
partner and others, the chairperson must cull
through myriad events, business situations,
reports, projects and governance issues that
potentially could be brought before the committee,
weed out those that waste valuable committee time,
home in on high-risk areas and rank topics worthy
of committee consideration. CPAs contemplating
audit committee membership should keep in mind
that serving in a leadership role, including as
chairperson of the committee, would not be
unusual.
LIABILITY ISSUES
Audit committee members have a
fiduciary duty to the company and to its
shareholders. Accordingly, legal liability
is a major concern for CPAs considering
joining a board of directors. While
directors can ease those concerns somewhat
by securing adequate directors &
officers insurance coverage as well as by
retaining legal counsel and other experts
to advise them, the liability is a reality
prospective directors must weigh before
accepting an invitation to join a board
and its audit committee. When researching
the company, CPAs not only have to review
the entity’s financial statements and
products but also investigate its
corporate reputation, management practices
and business ethics. In its final rule
on audit committee disclosure, the SEC
noted that in adopting the new rules and
amendments, “we do not intend to subject
companies or their directors to
increased exposure to liability under
the federal securities laws, or to
create new standards for directors to
fulfill their duties under state
corporation law.” The SEC went on to say
that it did not believe the disclosure
requirements would result in increased
liability exposure or create new
standards. It remains to be seen whether
one of the long-term consequences of
Sarbanes-Oxley is to increase or
decrease litigation. Nevertheless, from
the viewpoint of an individual director,
legal liability is—and will remain—a
major boardroom concern. |
|
PRACTICAL
TIPS TO REMEMBER
|
CPAs considering
joining the audit committee of
a corporate board of directors
should make sure they
understand the industry the
company operates in,
particularly if it is one with
special considerations, such
as the insurance industry.
Be aware that
audit committee service can
involve a time commitment that
goes beyond the hours spent
attending meetings. This
includes reading reports and
other materials prepared by
management, reviewing
financial statements, internal
audit reports and
correspondence from the
company’s external auditors.
Before accepting
an offer to join an audit
committee, CPAs should make
sure they and their firm are
independent of the company and
its management. The
requirements in Sarbanes-Oxley
make it particularly important
to check for any real or
apparent conflicts of
interest.
Prospective
committee members should
research the company
thoroughly before accepting an
invitation to serve as a
director. This includes
reading prior annual reports,
talking to current and past
board members, speaking with
employees and interviewing the
company’s external auditors.
| |
THE FINAL DECISION
Before deciding
whether to accept an offer to join an audit
committee, CPAs should take these steps:
Learn the law. Understand
the required roles, responsibilities and duties.
Read the sections of Sarbanes-Oxley that pertain
to audit committees. The AICPA Web site, www.aicpa.org ,
is an excellent resource.
Research the industry. Get
to know the industry in which the company
operates. (A good place to start is to obtain
material from industry associations and review the
Web sites of the company’s major competitors.) Use
this information to determine the extent to which
your skills and experience can be helpful and to
figure out how much effort you will need to devote
to learning the business.
Read the company’s audit committee
charter. Understand the
committee’s assigned breadth of responsibilities
and whether there are incremental duties over and
above those of traditional audit matters.
Speak to current and former committee
members. Ask them how long they
have served, their background, how much time they
devote to committee service, their perspective on
the key issues affecting the company and what
additional resources are available to the
committee.
Estimate your time commitment.
Make your own estimate of how much
time you will need to devote to carry out the
duties to your satisfaction and that of the
company. Make sure the requirements fit
comfortably with your own personal situation.
Evaluate your independence.
Are you, your firm and your other
clients independent of the company whose audit
committee you want to join? CPAs should check
carefully to make sure they have no conflicts of
interest before joining the board. Armed
with this information, CPAs can make an informed
decision on whether they want to become part of
the new vanguard in corporate governance
Sarbanes-Oxley has created. Six Points to
Ponder When Invited to Join an
Audit Committee Audit
committee membership can be an awesome
responsibility. This is particularly
true since the advent of Sarbanes-Oxley.
Here are some suggestions from board
members that CPAs should evaluate before
accepting a company’s invitation to join
its audit committee. 1
Make sure you research the
company well. CPAs should go
far beyond the company’s annual reports
and other financial data, according to
accountants who sit on audit committees
today. With cases like Enron, experts
say the importance of firsthand,
in-depth knowledge of the company’s
culture can’t be overrated. “Is
management straightforward and
forthright?” asks CPA Michael Bernstein
of Geller & Co. in New York City.
“Does it set a positive tone in carrying
out its responsibilities?” Bernstein,
who manages Geller’s finance and
accounting outsourcing group, recently
accepted an appointment as audit
committee chairman of a $50 million drug
company, Bradley Pharmaceuticals, in
Fairfield, New Jersey. If
staffers hesitate to speak up when
queried, Bernstein says a red light
should go off. “I suspect a problem if I
have difficulty getting candid
responses,” he says. Bernstein also
suggests CPAs interview the prospective
company’s audit firm at length. Among
the questions Bernstein asked Bradley’s
auditor, Grant Thornton, was its opinion
of the capabilities of the corporation’s
top financial officers and staff and
whether it knew of any reason why he
shouldn’t join the board’s audit
committee. 2 Don’t be
afraid to raise negative issues.
CPAs should talk to outside
professionals, directors and lawyers to
see whether there are any reasons why
they shouldn’t join the audit committee.
Don’t be afraid to explore negative
issues, although you may want to
experiment with your choice of words,
since even sensitive areas can be
approached with diplomatic language.
Candidates should do a thorough search
to reveal any litigation issues the
company is facing. This information is
available by contacting the company’s
legal counsel or its independent
auditors, who should have a confirmation
from management as of the latest audit
date about any legal issues the company
faces. Edwin H. Ruzinsky, CPA, urges
accountants to “question the motivation
of other directors for joining (or
leaving) the board, examine their
backgrounds, analyze where they fit in,
and their integrity and quality. If that
attitude had prevailed in the past in
corporate America,” Ruzinsky says, “we
wouldn’t be in this state.” It’s fair
game for the prospective director not
only to respond to questions at any
interview session but also to ask them
of the company’s existing directors.
CPA Robert Waxman says prospective
board members should listen for “pat
phrases” when employees respond to
questions. “If everything is centered on
‘Mr. Big’, you may have a virtual
dictatorship. Are there cronies, cousins
or other related parties on the board?
Do some dominate and others cower?” One
board member told Waxman during an
interview, “If you’re going to challenge
the president, they don’t want you on
the board.” Waxman says he had to ask
himself, “Does anyone ever
challenge the president?” Perhaps more
important, he had to ask himself whether
he wanted to serve on that company’s
board of directors. In this case, the
answer was no; Waxman didn’t join the
company’s board. 3
Familiarize yourself with the
company’s industry. Despite
45 years in accounting (15 in positions
of financial responsibility in the
publishing industry and almost 30 years
in public practice), Ruzinsky stuck to
the fields he was most familiar
with—medicine and publishing—in choosing
the three boards he agreed to sit on
after he retired from Deloitte &
Touche in 1996. Ruzinsky says to be
fully committed to all, he wouldn’t
agree to sit on more than four at one
time. In addition to two
not-for-profit groups (which don’t
currently come under Sarbanes-Oxley),
Ruzinsky sits on the board of Media
Sciences International Inc., a public
company that manufactures consumables
for color workgroup printers and is
traded on the American Stock Exchange.
As past president of the New Jersey
state board of accountancy, Ruzinsky
feels confident enough to be the sole
member of Media Sciences’ audit
committee who meets the Sarbanes-Oxley
requirements for a financial expert.
Ruzinsky cautions that prospective
directors can never be too careful in
checking out a company. Despite
previously serving as a consultant to
Dowden Health Media, a small private
medical publisher, Ruzinsky still met
with Dowden’s CEO at least four or five
times before taking on the chairmanship
of its audit committee. 4
Examine the company’s
directors & officers (D&O)
insurance. Gerry S. Weidema,
CPA, says she felt a higher degree of
comfort in weighing the risk of sitting
on a bank board, as opposed to a nonbank
public company, since banks are subject
to a higher level of scrutiny, coming
under the watchful eye of bank
regulators and the Comptroller of the
Currency. Yet, she still considered the
liability protection offered by the
bank’s D&O insurance a vital area of
concern before deciding to serve as a
director. Weidema says
prospective directors should study a
variety of factors that go beyond
whether the board is properly insured,
including a company’s internal policies.
She recently traveled to New York City
for a seminar for audit committee
members conducted by New York
University’s Directors Institute at the
New York Stock Exchange. Weidema says
she found the trip worthwhile because of
the case histories and panel discussions
the seminar included. “I learned the
most important thing a director can do
is to keep probing and asking
questions,” she says. “If you don’t
understand something, ask, don’t assume.
That word should be out of your
vocabulary. That advice really stood
out.” She notes that at
Banknorth, a regional bank in Portland,
Maine where she is a director, “no one
is ever made to feel stupid. It’s my job
to ask questions. If management doesn’t
have the answers, it gets them for me.
The company has a terrific internal
audit department that follows up and
gets back to us quickly.” 5
Make sure you are up to the
job. CPAs who are considering
accepting offers of corporate
directorships should have
Both an accounting and a
finance background.
The energy to execute the
responsibilities.
The ability to deal with
the heightened risk of knowing the SEC
and the public hold all board members—
especially those on the audit
committee—to a higher standard of
conduct.
The tenacity to confront
senior management and directors on
difficult issues. Time is a big
factor that many novices underestimate.
Weidema is cofounder and partner in
Weidema & Lavin, a two-person
accounting firm in Hampton, New
Hampshire, that specializes in tax
services for small businesses. She
became Banknorth’s first female audit
committee chairperson in April and
estimates the demand on her time—without
meetings—at a minimum of 5 to 10 hours a
month. In addition, the committee meets
six to eight times a year for about
three to four hours, not including her
travel time to the company’s Maine
headquarters. Weidema had served
as a nonvoting ad hoc member of the
audit committees of several banks that
were predecessors to the $26 billion
Banknorth. As a result, she says, she
was “very comfortable” about joining
Banknorth’s audit committee when it
extended the invitation to her.
6 Evaluate the downside—and
the opportunities. While
Ralph Ward of boardroominsider.com and
author of Saving the Corporate Board
says there aren’t yet any
statistics available on the number of
CPAs serving on audit committees, most
experts agree that large accounting
firms do not actively offer their
partners for audit committee seats.
“Even where the board position is with a
nonaudit client, you want your partners
to spend 100% of their time on firm
matters,” says Robert Waxman, founding
partner of Corporate Finance Advisory in
New York City and chairman of the New
York State society of CPA’s global
accounting and auditing committee. Plus,
Waxman adds, “there are bound to be
conflicts of interest with the firm. And
why have your partners be subject to
possible litigation?” Waxman
expects that, since section 301 of
Sarbanes-Oxley now provides for the
funding of outside advisers, more audit
committees will engage experienced CPAs
to offer advice on financial accounting
and audit matters. Also, notes Waxman,
NPO audit committees are expressing an
interest in complying with several
Sarbanes-Oxley requirements, and some
expect pressure on state regulators to
require certain NPOs to comply with some
Sarbanes-Oxley-like requirements.
Already sitting on one NPO’s board and
another’s audit committee, Waxman says
he has begun to actively seek election
as a director of a public company. With
experience in a CPA practice focusing on
investment banking, mergers and
acquisitions, accounting for derivatives
and hedging, SEC filings and compliance
and foreign GAAP, Waxman believes he is
ready to serve on an audit committee.
—Maureen Nevin Duffy is a
freelance business writer in New Jersey.
She is the editor and publisher of the
Corporate Governance Fund Report,
www.cgfreport.com , and the newly
launched CG Rate Monitor. | |