Board of Directors' Audit Committees

Although management has the primary responsibility for preparing the company's financial reporting, in a corporation the company's Board of Directors is responsible for overseeing that process. Members of the Audit Committee are responsible for helping the Board of Directors to assure the integrity of the company's financial reporting. Shareholders also rely on the Audit Committee to provide independent, effective oversight of the company's financial reporting process in order to protect the company's assets and its reputation. The role of the Audit Committee is not only financial reporting, but also fraud risk assessment.

The Audit Committee neither prepares financial statements nor is involved in the day-to-day decisions required to prepare financial statements. However, its fiduciary duties were expanded significantly following the passage of the Sarbanes-Oxley Act.  The Audit Committee can expect and can demand help from senior management in understanding the key elements of the company's internal financial controls. Specific functions of the Audit Committee include:

• To recommend changes to the audit committee's charter as conditions change,
• To determine the skills required for an audit committee member,
• To review and discuss candidly the financial performance of the company with senior management, and with the company's independent auditors,
• To act as liaison between the Board of Directors and the independent auditing firm, 
• To ensure that the company presents clear, reliable, accurate, consistent and timely financial reports to regulatory agencies, stockholders and other interested parties, 
• To reduce the risk of financial statement fraud,
• To evaluate the internal control systems implemented by management to control accounting activities and the financial reporting process, 
• To evaluate the effectiveness of fraud controls, including the role of the company's independent auditors and the scope of their audit function, and recommend changes or improvements when necessary, 
• To ensure that the corporate culture promotes ethical behavior and punishes wrongdoing, 
• To ensure segregation of duties and reporting responsibilities within the company when conflicts of interest might occur otherwise, 
• To convince company management of the audit committee's zero tolerance policy relating to aggressive or creative or fraudulent accounting techniques, 
• To eliminate the need to ever have to restate the company's financial statements, 
• To review new auditing standards or GAAP rules and ensure the company is in full compliance with them, 
• To identify and address financial risks in a timely manner, 
• To eliminate overly complex organizational structures that do not seem to exist for a legitimate business purpose. 

© 2009 by Michael C. Dennis.  All Rights Reserved.