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What makes the audit committee of a corporate board of directors effective? Looking at the reporting problems experienced in some fi
nancially troubled companies and examining the roles that audit committees play can provide valuable clues.
The National Commission on Fraudulent Financial Reporting, chaired by James Treadway (the Treadway commission), and the Public Oversight Board (POB) of the SEC practice section of the American Institute of CPAs have made recommendations on the attributes needed to enhance audit committee effectiveness and to improve the quality of financial reporting. This article reports on a study examining differences in the composition and meeting habits of audit committees of companies with and without financial reporting problems. By understanding the committees of problem companies, auditors should be able to anticipate and thus help companies avert financial reporting difficulties.
The U.S. accounting profession is not alone in focusing on audit committees and their effectiveness. They also have become issues of interest to U.S. regulators and to professional accounting bodies in other countries. For example, the Macdonald commission in Canada and the Cadbury committee in the United Kingdom have addressed the importance of audit committees in the corporate governance process.
The advisory panel on auditor independence appointed by the POB highlighted the role of audit committees in the financial reporting process. (See "How Directors and Auditors Can Improve Corporate Governance," JofA, Jan.96, page 53.) Among other issues, the panel stressed the importance of informed dialogue between the independent auditors and the audit committee. The panel also recommended that auditors be brought into the mainstream of corporate governance and suggested possible improvements in the interaction between auditors and audit committees. Prompted by such calls, the AICPA auditing standards board is engaged in a project to determine whether communications between auditors and the...