CBG: 7: Audit Committee

Audit committees of listed companies are required to:

- select external auditor -arrange audit and non-audit services -serve as a channel of communication b/w external auditor and the board and b/w head of internal audit and board -discuss press releases on earnings and review those earnings -provide oversight of the internal audit function -oversee the company's compliance with legal and regulatory requirements -meet periodically with reps of the corps disclosure committee if any -meet with legal counsel to review pending litigation -amongst other things on page 67 of the book.

Overseeing the Independent Audit

AC is responsible for the appointment, compensation, evaluation, and retention of the external auditor. After the audit, the committee should review for problems encountered. AC should understand accounting judgments and estimates that materially affect the corporations' financial statements. AC should discuss w/ Int. Auditor, any material weaknesses identified during the annual audit of internal controls. The audit committee should review, at least annually, with the external auditor and with the chief financial officer or chief accounting officer, major issues regarding, and any changes in, choices of accounting principles. Some audit committees find it useful to ask the external auditor to inform the committee what choices the auditor would have made if it, rather than management, had been responsible for preparing the financial statements. The committee also must review with the auditor the quality of management's accounting judgments.

Meetings and Compensation

About 4-8 meetings per year. Major securities markets: should meet at least 4 times a year. In person meeting with CEO, CFO, other senior financial managers, and external auditor in advance of each quarterly or annual earnings release.

Principal Functions

Federal law, SEC regulations, and securities market listing standards establish many of the duties. Written charter has duties for public companies. Must be reviewed annually and published on website or disclosed to shareholders. Committee has the authority to employ its own accountants, attorneys, or other advisors, and the Sarbanes-Oxley Act requires the corporation to pay for these advisors. Audit committee members should understand the tasks in the charter and develop a schedule for performing the tasks. Audit committees generally rely on the corporation's accounting, finance, treasury, internal audit, and legal staffs, as well as the corporation's external auditor, for information. The committee also has the authority to employ its own accountants, attorneys or other advisors, and the Sarbanes-Oxley Act requires the corporation to pay for these advisors.

General

General oversight responsibility for the company's financial reporting process and internal controls. It has exclusive responsibility for retaining and overseeing the performance and independence of the corporation's external auditor. When an ex. auditor audits co's internal controls over financial reporting under S. 404 of Sarbanes Oxley Act- it will evaluate the committee's performance. Forum in which auditors (internal and external) and legal counsel and compliance and ethics personnel report and discuss accounting, auditing, financial reporting, risk management, legal, compliance, and ethical matters.

Interaction w/ Internal Audit

NYSE requires listed companies to have an internal audit function- they can be employees of corporations or some outsource. The audit committee should routinely meet, in private, with the senior internal auditing executive to discuss the external audit function and relationship between the internal and external audit programs, to consider any special problems or issues that may have occurred since the last meeting and to review the implementation of any recommended corrective actions.

Membership

Public company members must be independent directors according to listing standards and federal securities laws. Usually can't receive any comp except for their director fees. Major securities markets: at least 3 members. Typically there are 3-5 independent directors. Major securities markets require that all committee members be financially literate, and one must have accounting or financial management experience. Sarbanes-Oxley Act requires that a public company must disclose in a report that they have an audit committee financial expert- " a term defined by SEC regulation and focused on accounting and audit knowledge and experience

Engaging the Auditors and Pre-Approving their Services

The audit committee must pre-approve all audit and non-audit services the external auditor performs during the year, as well as any audit-related services performed by any other auditing firm. This is to consider the auditor's independence The audit committee also reviews the hiring of any former personnel of the auditor to assure that it meets regulatory restrictions and will not affect the auditor's independence

Meetings with Auditors

The audit committee should meet w/ ext and int auditors in exec session w/o mgmt present. AC may also meet w/ mgmt to discuss the quality of services provided by the ext and int auditors. Discuss role in reviewing quarterly financial reports. The external auditor must assess whether the audit committee understands and exercises its oversight responsibility over financial reporting and internal controls.

Meeting with Compliance Officers

Unless there is another board committee responsible for compliance, the AC should meet at least once a year with officers responsible for implementing corp's codes of business conduct and compliance policies. Should meet with independent officers. AC should meet with GC often (general counsel). Officers with Compliance responsibilities: GC, Chief Internal Audit Officer, Chief Compliance Officer The general counsel should meet regularly with the audit committee, or another committee of independent directors, to communicate concerns regarding legal compliance matters, including potential or ongoing material violations of law by the corporation and breaches of fiduciary duties, violation of corporate policies, or ethical violations by senior managers.

Establishing procedures to handle complaints

must establish procedures --preferably anonymous- for employees to report concerns or complaints about accounting, internal controls, violations of code of ethics Company should decide who should gather, review, and process information. It can be the AC but then must have a process on how to act on the reports.