Making Your Audit Committee Effective

March 4, 2010

Audit committees face a challenging time in 2010. As the economy continues moving from recession to recovery, there are new dimensions to the oversight roles and responsibilities of the audit committees at public corporations, private companies and not-for-profit organizations. Here are some steps to consider and questions to ask to improve effectiveness.

    * Does the committee have an appropriate number of qualified members considering the size, structure and complexity of the organization? A company listed on the New York Stock Exchange must have an audit committee with a minimum of three members, but it may be prudent to increase the group beyond this requirement. 
    * Does the committee have unrestricted access to the organization's documents and personnel?
    * Before a meeting, are the agenda and other relevant written materials distributed to members so they have enough time to properly address the issues?
    * After a meeting, are the minutes distributed to everyone on a timely basis?

In addition, the audit committee should take time to review significant accounting changes that are likely to impact the company in the next 24 to 36 months. For example, International Financial Reporting Standards (IFRS) will require considerable time, effort and expense to adopt. Determining whether the finance function has the appropriate expertise and resources to support IFRS is an important step to ensuring successful implementation.

Consider Exposure to Companies Experiencing Financial Difficulties. The effects of a recession can take years to ripple through an economy. Suppliers, as well as customers, may still be experiencing those effects. Ensure that management has identified the company's material relationships and the potential financial and operational impact if any of those businesses go under.

Review All Disclosure Sources. In addition to regular financial reporting, companies use a myriad of resources to disclose information.

Focus on Fraud. As a result of the recession, and the related cost cutting, there may be an increased risk of internal and external fraud faced by your organization, including the theft of intellectual property. It is a good time to request that internal auditors commission a fraud risk assessment. Proactively assessing fraud risks can dramatically reduce the probability of losses occurring.

Consider Conducting a Review of Significant Findings uncovered by the company's internal audit department during the last 12 to 18 months, as well as the resulting steps taken by the management to address those issues. Not only will this exercise potentially uncover unresolved issues, it will provide the audit committee with a "pulse check" on the company's sense of urgency regarding the ability of risk mitigation and internal audits to address and track issue resolution.

According to corporate guru, Warren Buffett, audit committees should ask four questions of auditors and report the answers to shareholders.

    * If the auditor was solely responsible for preparing the company's financial statements, would they in any way have been prepared differently from the manner selected by management?
    * If the auditor was an investor, would he or she have received – in plain English, the information essential to understanding the company's financial performance during the reporting period
    * Is the company following the same internal audit procedure that would be followed if the auditor was the CEO? If not, what are the differences and why?
    * Is the auditor aware of any actions, either accounting or operational, that have the purpose and effect of moving revenues or expenses from one reporting period to another?

For more information, please contact your PerelsonWeiner partner.

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