Audit Committees and Corporate Governance
In the aftermath of accounting scandals at companies such as Enron and WorldCom, Congress passed the Sarbanes-Oxley Act that strengthens corporate governance mechanisms. One important requirement is for the audit committee of the board of directors to be completely independent of management. In the accounting scandals, the audit committee either didn't know about the fraud or chose to look the other way. A conscientious and diligent committee is an essential ingredient of an effective corporate governance system -- one that takes its role in financial statement oversight to heart and follows basic principles of responsibility, accountability, and transparency.
The Audit Committee Institute at the international accounting firm KPMG, recently issued "Ten To-Do's for Audit Committees in 2011." The msot important are: (1) Focus on financial reporting and strong internal controls; (2) Review the company's whsitleblower processes and compliance program; (3) Understand the significance of risks to the company's operations and financial reporting; (4) Consider whether the company's disclosures provide investors with the information needed to understand the state of the business; (5) Set clear expectations for the internal audit function and communication with the external auditors; and (6) Understand the audit committee's role in information technology.
There can be no doubt that a company would act more responsibly if its top officers -- the chief executive officer and chief financial officer -- embrace these goals and make them part of the corporate culture.