CPAs as Audit Committee Members

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.

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.

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.

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.

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.