Increased Focus on Audit Committees

It is difficult enough to serve on a corporate board.  It is not a job for the weak stomached.  Corporate boards have faced unprecedented risks.  Aside from general board duties, regulators are increasing scrutiny of board committees, especially audit committees.

In the early 2000s, audit committees were under the microscope after a series of corporate fraud scandals resulted in Sarbanes-Oxley reforms, focusing on internal controls, management financial certifications, enhanced audit committee responsibilities, and increased auditor oversight.

In response to the financial crisis of 2008, the  Dodd-Frank Act focused on corporate governance and executive compensation.  Audit committees were not the focus of this round of reform; instead, the Act focused on compensation issues. 

The Obama Administration and investors, however, have raised concerns about audit committees and the performance of auditors during the financial crisis.  The PCAOB, led by its new Chairman, James Doty, has launched a number of initiatives during this past year that once again put auditors and audit committees in the regulatory spotlight.   

The PCAOB has launched four separate projects to address: (1) Auditor independence, including the possibility of audit firm rotation; (2) Increasing requirements for audit committee communications; (3) Greater audit transparency and disclosures of auditors; and (4) Expanding auditor reports to require that specific issues are addressed.

The most controversial of the PCAOB’s proposals is to require that public companies change their audit firms.  Such a requirement could increase company costs and reduce quality.  Audit committees would have limited discretion to retain certain firms if they come up against a mandatory rotation requirement.   

Aside from this proposal, the other three initiatives could have significant impact on audit committees by requiring increased communications and discussions between auditors and audit committees; increased transparency and disclosure of personnel involved in the audit; and changes in the nature and substance of audit reports.

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