Audit Committee Service Precautions

“ CPAs as Audit Committee Members” does a very nice job outlining many issues prospective audit committee members need to address. For those thinking about audit committee service, it’s also important to consider what research tells us about key red flags for accounting trouble.

Studies have found that public company financial reporting fraud often is associated with weak boards of directors, weak audit committees, unethical CEOs, companies in volatile or complex industries—computer hardware and software, financial services and health care, for example—and smaller businesses.

I encourage prospective audit committee members to carefully evaluate the extent to which these factors are present, with particular focus on the independence, diligence and expertise of the current audit committee members and the CEO’s integrity.

If you are considering audit committee service in a higher-risk setting, then you need to ensure the directors and officers insurance policy and other protections will reduce your risk to an acceptable level.

Dana R. Hermanson
Professor of Accounting
Kennesaw State University
Kennesaw, Georgia