The Audit Committee

Letter from the Co-Chairs

Effective oversight of financial reporting— even in times of growth and relative calm— is no simple matter for an audit committee. Add in a global financial crisis, economic recession and uncertainty, sweeping regulatory reforms, and unprecedented expectations by investors and regulators for transparency and accountability, and you have one of the most demanding, challenging—and vital—roles in Corporate America.

It’s not a stretch to say that the financial and economic crisis and ensuing volatility and uncertainty in the United States and global markets have put audit committees, and the financial reporting systems they oversee, through a gauntlet. To be sure, some were well prepared—likely buoyed by systems and processes put into place following the Sarbanes-Oxley Act of 2002. Others were less prepared—and the crises exposed critical gaps in their financial reporting systems, oversight processes, or both.

Investors’ and regulators’ expectations of audit committees have always been high; but the demands and challenges facing audit committees have perhaps never been greater: complex accounting rules and regulations, innovative financial instruments, the global nature of businesses, product innovation, pressures on companies to meet expectations and stay competitive—there is little that doesn’t impact a company’s financials. And, as one seasoned audit committee chair often reminds us: If it’s complicated and requires a lot of time and detailed focus, it usually lands on the audit committee’s plate.

This paper is not intended to be a comprehensive manual or treatise on the duties and responsibilities of the audit committee (which is readily available from numerous sources today). Rather, drawing on the experiences and insights of our Blue Ribbon Commission (Commission) members, as well as the thoughtful work and writings of others in the business, audit, and governance arenas, including the NACD National Audit Committee Chair Forum, it is intended to offer practical perspectives, suggestions, and leading practices on what makes an audit committee effective.

No single approach will work best for every audit committee; but we believe the perspectives and leading practices outlined in this report (including ten guiding principles) will help audit committees and boards—as well as auditors, managers, and others—drive the financial reporting process to provide investors, regulators, and the market with a clear and accurate picture of the company’s performance, risks, and prospects.

Dennis R. Beresford
Michele J. Hooper