Chapter 1

Audit Committee
Formation in the
Aftermath of the
20072009 Global
Financial Crisis, Volume I
Structure and Roles
Zabihollah Rezaee
Audit Committee Formation in the Aftermath of the 2007-2009 Global

Financial Crisis, Volume I: Structure and Roles
Copyright Business Expert Press, LLC, 2016
All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system, or transmitted in any form or by any means
electronic, mechanical, photocopy, recording, or any other except for
brief quotations, not to exceed 250 words, without the prior permission
of the publisher.
First published in 2016 by
Business Expert Press, LLC
222 East 46th Street, New York, NY 10017
www.businessexpertpress.com
ISBN-13: 978-1-63157-156-5 (paperback)
ISBN-13: 978-1-63157-157-2 (e-book)
Business Expert Press Financial Accounting and Auditing Collection
Collection ISSN: 2151-2795 (print)
Collection ISSN: 2151-2817 (electronic)
Cover and interior design by S4Carlisle Publishing Services
Private Ltd., Chennai, India
First edition: 2016
10987654321
Printed in the United States of America
Abstract
The audit committee, as an integral component of corporate governance,
has gained considerable attention in the aftermath of 20072009 global
financial crisis. The audit committees role has evolved from a voluntary
liaison between management and external auditors to the standing committee of the board of directors in overseeing all aspects of corporate governance, financial reporting, internal controls, risk assessment, and audit
activities. This book addresses the determinants of audit committee oversight effectiveness, including their composition, independence, authority,
resources, diligence, and activities. Today, audit committees operate in an
environment of ever-increasing corporate governance reforms established
to protect investors and the public from receiving misleading financial
statements and related audit reports. Audit committees, in complying
with emerging corporate governance reforms, are striving to improve
their oversight effectiveness to discharge their oversight responsibilities.
This book is organized into three separate volumes, and each volume
can be utilized separately or in an integrated form. The first volume addresses the formation of the audit committee, its relevance, sources, structure and roles; the second volume focuses on the oversight functions of
the audit committee; and the third volume presents the emerging issues
of audit committees. The first volume consists of five chapters that examine the relevance and fundamentals of the audit committees as well as the
determinants of audit committee effectiveness. The second volume consists of nine chapters on financial, auditing, internal control, risk management, ethics and compliance, antifraud, and other oversight functions of
the audit committee. The third volume consists of several chapters on the
emerging issues of audit committees pertaining to evaluation, education,
reporting, and accountability as well as audit committees of private companies, governmental entities, and not-for-profit organizations.
The three volumes of this book present the essential and fundamental
aspects and functions of audit committees, with a keen focus on their
working relationship with other corporate governance participants including the board of directors, executives, internal auditors, external auditors, legal counsel, financial analysts, investment bankers, governing
bodies, standard setters, and other stakeholders. Anyone who is involved
vi ABSTRACT
with corporate governance, the financial reporting process, and audit

functions should be interested in this book. Specifically, corporations and
their executives, the boards of directors and audit committees, internal
and external auditors, accountants, governing bodies, users of financial
statements (investors, creditors, pensioners), business schools, and other
professionals (attorneys, financial analysts, bankers) will benefit from this
book. The three volumes of the book focus on up-to-date corporate governance measures and best practices in the aftermath of the global financial crisis and their impacts on audit committee effectiveness.
Keywords
Audit Committee, Corporate Governance, Oversight Effectiveness, Financial
Reports, Audit Functions, Risk Assessment, Internal Controls, Business
Ethics, Audit Committee Structure, Composition, Responsibilities and
Accountability
Contents
Preface...................................................................................................ix
Acknowledgments..................................................................................xiii
Introduction.......................................................................................... xv
Chapter 1 Role, Foundation, Regulation, and Structure of the
Audit Committee...............................................................1
Chapter 2 Sources and Drivers of the Audit Committee...................37
Chapter 3 Framework for Audit Committees....................................77
Chapter 4 Audit Committee Resources...........................................113
Chapter 5 Evaluation, Education, and Training of Audit
Committee Members.....................................................147
Index..................................................................................................173
Preface
The wave of financial scandals at the turn of the 21st century and the
20072009 global financial crisis brought corporate governance to center
stage, encouraged massive regulations, rules, standards, and best practices
that redefined the corporate governance structure and established significant corporate governance reforms. The audit committee, as an integral
component of these corporate governance reforms, redefined its own
framework for engaging in and overseeing all aspects of corporate governance, financial reporting, internal controls, and audit activities. This
book presents all applicable laws, regulations, rules, standards, guiding
principles, and best practices affecting the operation, structure, resources,
and functions of audit committees, promoting audit committees to find
unique and innovative ways to improve their oversight effectiveness. The
audit committees role in effectively overseeing the responsible corporate
governance, reliable financial reporting process, effective internal control
structure, and credible audit functions has become a norm for public
companies, a demand from regulators, a mandate of the capital markets,
and a means of protection for investors.
The evolution of audit committees shows that the audit committee
has evolved from a debate over whether or not to voluntarily create audit
committees to mandatory requirements for the establishment of audit
committees, and now, in the light of current corporate governance reforms, on how to effectively integrate the audit committee into corporate
oversight functions as an important element of internal mechanisms for
corporate governance. Today, audit committees operate in an environment of ever-increasing corporate governance reforms established to protect investors and the public from financial scandals. Audit committees,
in complying with emerging corporate governance reforms, are striving to
improve their oversight effectiveness. This book addresses stakeholder expectations of audit committees and the determinants of audit committee
x PREFACE
oversight effectiveness, including their composition, independence, authority, resources, diligence, and activities.
This book is organized into three separate volumes and each volume
can be utilized separately or in an integrated form. The first volume
addresses the formation of the audit committee, its relevance, sources,
structure and roles; the second volume focuses on the oversight functions of the audit committee; and the third volume presents the emerging issues of audit committees. The first volume consists of five chapters
that examine the relevance, fundamentals and the determinants of the
effectiveness of the audit committee. The second volume consists of
nine chapters on financial, auditing, internal control, risk management,
ethics and compliance, antifraud, and other oversight functions of the
audit committee. The third volume consists of several chapters on the
emerging issues of audit committees pertaining to evaluation, education, reporting, and accountability as well as financial and auditing
processes.
The three volumes of this book present the essential and fundamental aspects and functions of audit committees with a keen focus
on their working relationship with other corporate governance participants including the board of directors, executives, internal auditors, external auditors, legal counsel, financial analysts, investment
bankers, governing bodies, standard setters, and other stakeholders.
Anyone who is involved with corporate governance, the financial reporting process, and audit functions should be interested in this book.
Specifically, corporations and their executives, the boards of directors
and audit committees, internal and external auditors, accountants,
governing bodies, users of financial statements (investors, creditors,
pensioners), business schools, and other professionals (attorneys, financial analysts, bankers) will benefit from this book. The three volumes of the book focus on up-to-date corporate governance measures
and best practices in the aftermath of the global financial crisis and
their impacts on audit committee effectiveness. Audit committees
represent shareholders interests and have in-depth knowledge of the
company, its business strategy, its operations, its financial reporting
requirements, and its audit activities. The three volumes should assist
PREFACE
xi
audit committees to effectively discharge their oversight functions in

the following emerging areas:
1. Overseeing how auditors are appointed, what kind of work theyre
allowed to do, and their fees.
2. Overseeing the companys policies with respect to risk assessment
and risk management, including the risk of fraud, and the steps
management has taken to monitor and control such risks.
3. Reviewing with senior management the companys overall antifraud
programs and controls.
4. Discussing with the internal auditors and the independent registered
public accountants the overall scope and plans for their respective audits, including the adequacy of staffing and budget or compensation.
5. Reviewing and discussing the quarterly financial statements, including Managements Discussion and Analysis of Financial Condition
and Results of Operations, with management and the independent
registered public accountants prior to the filing of the Companys
Quarterly Report on Form 10-Q.
6. Overseeing the annual audited financial statements, including
Managements Discussion and Analysis of Financial Condition and
Results of Operations, with management and the independent registered public accountants prior to the filing of the Companys Annual
Report on Form 10-K.
7. Discussing with management its process for performing its required
quarterly certifications under Section 302 of the Sarbanes-Oxley Act
(SOX), including the evaluation of the effectiveness of internal control over financial reporting (ICFR) by the Chief Executive Officer
and the Chief Financial Officer.
8. Reviewing the companys compliance and ethics programs, including consideration of legal and regulatory requirements, and the effectiveness of such programs.
9. Establishing procedures for the receipt, retention, and treatment of
complaints received by the company regarding accounting, internal accounting controls, or auditing matters, and the confidential,
anonymous submission by employees of the company of concerns
xii PREFACE
regarding questionable accounting or auditing matters in compliance with provisions of both SOX and DoddFrank Act (DOF).
10. Reviewing information technology (IT) risk and emerging technologies, the appropriate use of IT in moving toward Extensible Business
Reporting Language (XBRL)-formatted corporate reporting and
electronic continuous auditing.
11. Reviewing risk management.
12. Overseeing legal/regulatory compliance.
13. Reviewing of integrated financial and internal control reporting
(IFICR) including executive certifications of financial statements
and internal controls and audit reports on financial statements and
internal controls.
14. Communicating with external auditors to improve quality, reliability, and transparency of financial reports. This two-way robust communication is intended to improve audit quality, strengthen auditor
independence, promote effective corporate governance, and protect
investor interests.
15. Overseeing whistle-blowing policies and practices including ethical
compliance.
16. Encouraging their organizations to move toward integrated and
sustainability reporting reflecting both financial economic sustainability performance and non-financial environmental, ethical, social,
and governance sustainability performance.
Sincerely,
Zabihollah Rezaee
March 21, 2016
Acknowledgments
I acknowledge the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the American Institute of Certified
Public Accountants, and Big Four Accounting Firms for permission to
quote and reference their professional standards and other publications.
The encouragement and support of my colleagues at the University
of Memphis are also acknowledged. Specifically, two of my graduate assistants, Mr. Rob Palmer and Mr. Josh McDonald provided invaluable
assistance. I thank the members of the Business Expert Press team and
S4Carlisle Publishing Services for their hard work and dedication in editing
the book, including Stewart Mattson, Scott Isenberg, Scott Showalter and
Jan Williams, Mark Bettner, Michael Coyne, and Premkumar Narayanan.
My sincere thanks are due to my family, my wife Soheila, and my
children Rose and Nick. Without their love, enthusiasm, and support,
this book would not have come to fruition when it did.
Zabihollah Rezaee
May 12, 2016
Introduction
The 20072009 global financial crises have eroded the public trust and
investor confidence in corporate governance and the financial reporting
process. Policymakers, regulators, and the business community have responded by taking proper initiatives to prevent further occurrences of
financial crises. Restoring the public confidence requires a significant coordinated effort, regulatory measures, and best practices by policymakers,
regulators, business organizations, and the accounting profession. One
of the key provisions of these regulatory reforms, which seeks to restore
public confidence, is that a properly constituted and functioning audit
committee can improve the quality of financial reporting by acting as an
effective arbitrator in management and auditor disputes. Thus, this volume addresses the audit committee attributes as an integral component
of corporate governance to improve quality, reliability, and transparency
of financial reports and credibility and effectiveness of the related audit
functions. The effectiveness of the audit committee depends on the quality, timeliness, and reliability of information it received from management, internal auditors, legal counsel, and external auditors regarding
financial, internal control, risk, legal, and auditing issues.
The first volume presents the essential and fundamental aspects and
functions of audit committees with a keen focus on their working relationship with other corporate governance participants including the
board of directors, executives, internal auditors, external auditors, legal
counsel, financial analysts, investment bankers, governing bodies, standard setters, and other stakeholders. This volume presents the roles, responsibilities, structure, composition, qualification, authority, resources,
and other attributes of the audit committee in accordance with the most
recent regulatory requirements and best practices. Anyone who is involved with corporate governance, the financial reporting process, and
audit functions should be interested in this volume. Specifically, corporations and their executives, the boards of directors and audit committees,
xvi INTRODUCTION
internal and external auditors, accountants, governing bodies, users of

financial statements (investors, creditors, pensioners), business schools,
and other professionals (attorneys, financial analysts, bankers) will benefit
from this volume. This volume consists of the following chapters:
CHAPTER 1:ROLE, FOUNDATION, REGULATION,
AND STRUCTURE OF THE AUDIT
COMMITTEE
CHAPTER 2:SOURCES AND DRIVERS OF THE AUDIT
COMMITTEE
CHAPTER 3:FRAMEWORK FOR AUDIT COMMITTEES
CHAPTER 4:AUDIT COMMITTEE RESOURCES
CHAPTER 5:EVALUATION, EDUCATION, AND
TRAINING OF AUDIT COMMITTEE MEMBERS
CHAPTER 1
Role, Foundation,
Regulation, and Structure
of the Audit Committee
Executive Summary
This chapter provides an introduction to the relevance and status of
corporate governance and the audit committee in the financial markets.
The audit committee as an integral component of corporate governance
assumes oversight responsibilities on all aspects of corporate governance
from financial reporting, to internal controls and audit activities. One
of the key provisions of the SarbanesOxley Act (SOX) of 2002, which
seeks to restore investor confidence in public financial information, is
that a properly constituted and effective functioning audit committee can
improve the quality of financial reporting by acting as an effective arbitrator in management and auditor disputes. Audit committees operate in an
environment of ever-increasing corporate governance reforms established
to protect investors and the public from financial scandals. Audit committees, in complying with emerging corporate governance reforms, are
striving to improve their oversight effectiveness. In the aftermath of SOX,
every public company should have an audit committee composed of at
least three independent directors with adequate financial expertise. Audit
committee structures and practices should be implemented in protecting
shareholders from receiving misleading and misstated financial information and in enhancing the companys accountability to all stakeholders.
This chapter examines the relevance and determinants of audit committee oversight effectiveness, including their composition, independence,
authority, resources, diligence, and activities.
AUDIT COMMITTEE FORMATION, VOLUME I
Introduction
The wave of financial scandals at the turn of the 21st century and the
20072009 global financial crisis brought corporate governance to
center stage and encouraged massive regulations, rules, standards, and
best practices that redefined the corporate governance structure. In the
aftermath of the global financial crisis, public companies are closely
scrutinized by regulators to improve their corporate governance in preventing further occurrences of financial scandals. The boards of directors of public companies are faced with challenges of governance, risk
assessment, internal control, and financial reporting as well as compliance with rules, regulations, and standards. These ongoing challenges
should be effectively addressed by the board of directors and its various board committees including the audit committee.1 Public companies are also facing more challenges including the ever-increasing threat
of cyberattack, globalization, and technological advances. In light of
ever-increasing corporate governance reforms, the audit committee is
redefining its structure and role of engaging in overseeing all aspects of
corporate governance from financial reporting to internal controls, risk
assessment, and audit activities.2
This chapter presents all applicable laws, regulations, rules, standards,
guiding principles, and best practices affecting the operation, structure,
resources, and functions of audit committees. The audit committees
role in effectively overseeing the effectiveness of corporate governance,
reliability of financial reporting process, effectiveness of internal controls, and proper assessment of risks and credibility of audit functions
has become a norm and best practices for public companies. Investors
demand, regulators require, and business organizations ensure vigilant
audit committee in protecting investor interests and enhancing reliability of their financial reports.
In the past several decades, the audit committee has evolved from
a decision to whether or not to voluntarily create audit committees to
act as a liaison between external auditors and management to preserve
auditor independence to the mandatory requirements for the establishment of audit committees, and their integration into corporate oversight functions. This chapter examines the relevance and importance
ROLE, FOUNDATION, REGULATION, AND STRUCTURE
of audit committees to our financial markets and the determinants of

audit committee oversight effectiveness, including their role, composition, independence, authority, resources, responsibilities, diligence, and
activities. It also presets audit committees working relationships with
other participants in corporate governance including the board of directors, executives, governing bodies, standard setters, internal auditors,
external auditors, financial analysts, legal counsel, investors, and other
stakeholders. Over the past several decades, the business and investment
communities increasingly have demanded the establishment of vigilant
and diligent audit committees. In the aftermath of the 20072009 global
financial crisis, an effective audit committee is deemed an essential component of corporate governance in improving a companys strategic decisions, financial reporting, internal control, risk assessment, anti-fraud
prevention, and audit functions.
The Role of the Audit Committee

in Public Companies
More than half of Americans now participate in financial markets through
either direct investments or through investments in mutual funds and
pension funds. Investor confidence in efficacy and efficiency of financial markets is the cornerstone of our nations economic growth, stability,
and prosperity. Public financial information plays an important role in
providing investors with useful, reliable financial information in making
sound investment decisions in achieving integrity and efficiency in the
financial markets, and audit committees play an important role in overseeing the reliability of financial information disseminated to the financial markets by public companies. Misleading, misstated, and fraudulent
financial information can diminish investor confidence and public trust
in the financial markets and the public financial information disseminated to the market by public companies. Audit committees are key to
regaining the publics trust and investor confidence through overseeing
the reliability of financial reporting process. Companies have started to
disclose their audit committee charters for investors to learn about their
responsibilities and functions of audit committees in improving both
financial reporting and audit processes.
The audit committee is empowered to protect investors from r eceiving

misleading and misstated financial information by helping public companies achieve high-quality financial reports, which contribute to the
safety, integrity, and efficiency of our financial markets. The early 2000s
witnessed an unprecedented decline in public trust and an erosion of investor confidence in public financial information and the same scenario
was repeated during the global 20072009 financial crisis. The soundness, efficiency, liquidity, and safety of the financial markets have been
threatened by the 20072009 financial crisis, which was caused by many
macroeconomic and microeconomic factors. Macroeconomic factors include subprime mortgage crisis, ineffective regulation and supervision
of banks, collapse in the asset-backed commercial paper (ABCP) market, unintended consequences of government policies promoting home
ownership, and highly leveraged financials and expanded credit growth.3
Microeconomic factors consist of greed and incompetency of corporate
and bank executives, inadequate risk assessment of business transactions,
lack of transparency of public financial information, and ineffective audit
committees in overseeing risk management and financial reporting and
audit processes.4
Distrust in the reliability and quality of financial information may
adversely affect the effective functioning of the capital markets and the
public trust and investor confidence in public financial information.
Audit committees are also being blamed for not preserving auditors independence from their clients management because of large fees that audit
firms were earning from the non-audit services.5 In the aftermath of the
20072009 global financial crises, many suggestions and best practices
for audit committees have been developed to rebuild investor confidence
and public trust in public financial information and thus the financial
markets. For example, Russell Novak & Co. LLP (2010) has found five
ways that audit committees can contribute to rebuilding public trust in
public financial information as summarized in Exhibit 1.16 and described
in the following paragraphs.7
First, the audit committee should assess the quality of the companys
financial reporting process. This assessment should gauge the financial reporting performance against entity-specific benchmarks, which proves important in managing investor expectations. There are five key determinants
Exhibit 1.1
Ways audit committees can rebuild the
public trust and investor confidence in
public financial information
1. Assess financial
reporting quality
1. Relevance Information is useful and provided in a

timely manner.
2. Reliability Faithful and verifiable information.
3. Neutrality Information is free from bias.
4. Comparability Financials are comparable to periods
of time and other companies.
2. Evaluate processes for

reviewing financial
information
Evaluate and review financials to become aware of weak

reporting and risks arising from disclosures.
3. Conduct a peer group

comparison
Arrange periodic comparisons of quality performed among

entities and its industry peers to indicate matters such as
increasing leverage, declining liquidity, and inadequate
cash flows.
4. Obtain industryspecific training
Obtain tailored industry-specific training to penetrate

questions and evaluate answers about accounting and
financial reporting matters.
Develop self-assurance to challenge management and
outside auditor decisions while staying abreast of current
developments in accounting.
5. Consult with
an independent
accounting and
auditing advisor
Obtain legal and financial reporting assistance, which

rebuilds trust and confidence in the integrity in financials.
that are important in evaluating the quality of information according to

the Statement of Financial Accounting Concepts No.2.8 One determinant
is relevance, which is measured in terms of the informations usefulness
and whether it is current and timely. Timely information should be available to the users before it becomes irrelevant to decision making. Predictive value permits the users to evaluate the likelihood of recurring earnings
and assess opportunities and risks associated with individual business units
or geographic areas. The next factor is reliability, which ensures that transactions are verifiable and represent faithful representation of events. The
components of reliability are measurability and completeness. Information
must contain reasonably consistent interpretation by knowledgeable third
parties, and it identifies and presents all aspects of events and transactions
that could alter the users conclusions. Third, neutrality determines an
aspect of quality. Neutrality is measured in terms of objectivity as information should be free from bias. Finally, when financial information is
prepared and presented in a manner that allows informed comparison to
other periods of time and to other companies, it is considered as being
comparable, which is more relevant for decision making.
Next, audit committees should evaluate processes for reviewing
financial information. Regular evaluations of the companys and boards
processes not only make the audit committee aware of any weak reporting,
but also inform the audit committee regarding the effectiveness of internal controls and quality financial reporting. This evaluation should suggest
ways that the company can improve processes so that current or anticipated
problems can be avoided. Third, conducting a group comparison among
industry peers and among peer companies can help rebuild the public trust.
Audit committees can greatly benefit from insights regarding matters such
as relationships between financial statements that differ significantly from
those of the companys peers best practices. Audit committees should be
able to identify key issues such as overly aggressive accounting principles or
distorted comparisons with peer companies, and question the underlying
management decisions that may have contributed to the situation.
Additionally, to enhance the audit committees understanding of
appropriate reporting policies and best practices in the related industry,
it is important to obtain tailored, industry-specific training for all audit
committee members. Training enables audit committee members to develop the self-assurance needed to challenge management and outside
auditor decisions on accounting and reporting choices they have made.
This also provides additional assurance to outside investors. Finally, audit
committees can rebuild public trust by consulting with an independent
accounting and auditing advisor. Under SOX, as explained in the following section, audit committees have the right to obtain both legal and
financial reporting advisors. An accounting advisor represents significant
value in the appearance and substance of public trust and boosts confidence in the integrity of financial reporting systems and processes. Audit
committees are advised to seek assistance in: (1) their financial literacy
and expertise requirements under the rules of the exchanges and SOX;
(2)the content of the audit committee report in the annual proxy statement; and (3)thecommittees discussion with the independent auditors regarding the auditors judgments on the qualitative characteristics of
financial reporting and accounting information.
Regulatory Requirements for Audit Committee

In response to the wave of financial scandals (Enron, Global Crossing,
WorldCom), several initiatives including the passage of SOX and listing
standards by national stock exchanges have been taken to restore investor
confidence and public trust in financial reports.9 Exhibit 1.2 presents some
Exhibit 1.2
Summary of some provisions of
the Sarbanes-Oxley Act of 2002
1. Establishment of Public Company Accounting Oversight Board
(PCAOB). The PCAOB is composed of five members where
only two members are allowed to have experience as a certified
public accountant and the chairperson must not have practiced
accounting during the 5 years preceding the appointment as
a chair. The SEC is given power to appoint the PCAOB after
consultation with the chairman of the Board of Governors of
the Federal Reserve System and the Secretary of the Treasury.
The PCAOB is empowered to investigate and discipline public
company auditors. The board is also authorized to set auditing,
quality control, ethics, independence, and other standards
relating to the preparation of audit reports. The PCAOB is an
independent body that operates as a nonprofit corporation under
the oversight function of the SEC. Operation of the PCAOB
changes governance of the auditing profession from traditional
self-regulatory regime to regulatory environment under the
oversight function of the SEC.
(Continued)
2. SOX prohibits auditors from performing a variety of non-audit

services contemporaneously with the audit (e.g., bookkeeping,
financial information systems design and implementation,
appraisal or valuation services, actuarial services, internal audit
outsourcing services). However, some non-audit services such as
tax services may be performed upon pre-approval by the audit
committee on a case-by-case basis and proper disclosures to
investors.
3. SOX requires publicly traded companies to have an audit
committee composed of independent members of the board of
directors. The audit committee should be directly responsible
for the appointment, compensation, and oversight of the work
of external auditors in order to preserve their independence,
integrity, and objectivity.
4. Corporate top executives (e.g., CFO, CEO) should certify that
financial reports (annual or quarterly) do not contain any untrue
statements and they fairly present in all material respects the
companys financial condition and results of operations.
5. Corporate top executives are responsible for establishing and
maintaining internal controls and reports on the adequacy,
effectiveness, and any limitations of internal controls. Independent
auditors should express their opinions on management assessment
of the adequacy and effectiveness of internal controls as an integral
part of audit of financial statements.
6. Corporate executives should repay any bonus or other
incentive-based or equity-based compensation received if the
company is required to prepare an accounting restatement due to
material misstatements caused by fraud.
7. SOX increased the prison sentences for wire and mail fraud
and a new category of crime for securities fraud to a 20-year
maximum sentence.
8. SOX makes document shredding unlawful and a crime subject
to prison. Auditors of publicly traded companies should retain
work papers for at least 5 years in sufficient detail to support the
conclusions in the audit report.
9. SOX ensures that corporate fraud, including financial statement

fraud, is punishable regardless of when it is discovered by extending
the statute of limitations for bringing a lawsuit for fraud.
10. SOX requires the lead partner in charge of the audit and the
audit partner responsible for reviewing the audit be replaced
every 5 years. SOX also prohibits accounting firms to audit
public companies when CEO, CFO, controller, chief accounting
officer, or other equivalent financial officers had worked for the
accounting firm during the preceding year. SOX, however, stops
short of mandating periodic rotation of audit firms. Instead, it
directs the Comptroller General of the United States to conduct
a study on the potential effects of requiring the mandatory
rotation of registered public accounting firms.
11. SOX directs the SEC to conduct a study of securities professionals
including public accountants, public accounting firms, investment
bankers, brokers, dealers, and attorneys who have been found to
have aided and abetted a violation of Federal Securities laws.
12. SOX authorizes the SEC to recognize GAAP that are issued
by a standard-setting body (e.g., the FASB) that is a private
entity, governed by a board of trustees, and funded in a
manner similar to the PCAOB. SOX attempts to make the
FASB more independent by obtaining funds from all public
corporations rather than relying on voluntary contributions
from corporations and public accounting firms. However, the
FASB will continue to operate under the oversight function of
the SEC. SOX authorizes the PCAOB to decide to what extent
to adopt auditing standards already promulgated by the ASB of
the AICPA or other groups. The PCAOB has already decided to
issue future auditing standards and during the transition period,
adopt the existing auditing standards developed by the AICPA.
of the provisions of SOX relevant to the audit committee, and Exhibit1.3
describes the audit committee in the pre- and post-SOX era. SOX and related
Securities and Exchange Commission (SEC) implementation rules also significantly affect the structure, composition, functions, and responsibilities of
10
Exhibit 1.3
The audit committee Pre- and
Post-SarbanesOxley Act
Pre-SarbanesOxley Act Post-SarbanesOxley Act
Voluntary audit committees
Personal and economic
ties to management and
corporation
Liaison between management
and independent auditors
Limited knowledge of
financial reporting
Infrequent and short
meetings
Lack of proper authority and
resources
Limited oversight functions
Lack of proper accountability
Mandatory audit committees

Independent members of audit committees
Oversee financial reports and audit function
Financial expertise
Appoint, compensate, retain, and oversee
independent auditor
Pre-approve audit and permissible non-audit
services
Comply with new requirements for
independent directors
Establish procedures for receipt, retention, and
treatment of complaints relating to accounting,
auditing, and internal control matters
Have authority to engage advisors
Be given appropriate funding, as determined by
the audit committee, for external auditors and
advisors
Disclosure of existence of at least one audit
committee financial expert, if not, why not
Name of the audit committee financial expert
and whether independent from management
Hiring, compensating, and hiring chief audit
executive
Oversee internal control over financial
reporting
Oversee audit plan, scope, and work of the
independent auditor
Review audit plan, scope, findings, and
recommendations of internal auditors
Written detailed charter
Formal annual evaluation
audit committees. Underlying both SOX and the SEC-related regulations is

the presumption that the presence of certain features in the audit committee
is a prerequisite for the committee to effectively fulfill its oversight function.
Specifically, the audit committee should be independent, competent, financially literate, adequately resourced, and properly compensated.
11
SOX mandates the following requirements for audit committees:

(1)theaudit committee should be composed entirely of independent members of the board of directors; (2) the audit committee should be directly responsible for the appointment, compensation, and oversight of the work of
external auditors; (3) the audit committee should have authority to engage
advisors; (4) the audit committee should be properly funded to effectively
carry out its duties; (5) auditors must report to the audit committee all the
critical accounting policies and practices used by the client; and (6) the
SEC should issue rules to require that public companies disclose whether at
least one member of their audit committee is a financial expert.10 The corporate governance principles and listing standards of major stock exchanges
(e.g., NYSE, NASDAQ) also provide guidelines for audit committees, including the sole authority to hire, fire, and retain independent auditors to
audit financial statements and to approve any permissible non-audit services
as well as the authority to hire the head of the internal audit function (Chief
Audit Executive) as explained in details in the next chapters.
A number of global regulatory reforms have been introduced to minimize the detrimental effects of the 20072009 financial crisis and prevent
its further occurrences, including the DoddFrank Act (DOF) of 2010.11
Provisions of DOF mainly pertain to financial services firms including
banks, hedge funds, credit rating agencies, and the derivatives market.
DOF is intended to reduce the likelihood of future financial crisis and
systemic distress by empowering regulators to require more effective corporate governance and higher capital requirements for financial institutions. DOF creates new regulatory regimes for large financial institutions
and requires regulatory and market structures for financial derivatives
demanding the systemic risk assessment and monitoring of financial markets. Several provisions DOF that address corporate governance practices
of financial institutions and public companies that may have some implications for audit committees are:
1. Empowering shareholders with a non-binding vote (say on pay, and
say on golden parachutes) on executive compensation;
2. Establishing clawback provisions by public companies including
banks to recover payments to current and former executives when
published financial statements are subsequently restated;
12
3. Disclosing any incentive-based arrangements that may encourage

inappropriate and excessive risk taken by management by linking
executive compensation to executive performance;
4. Providing the rationale for choosing a combined or separate role of
the chief executive officer (CEO) and the chair of the board of directors (CEO duality);
5. Disclosing of the internal executive compensation ratio, which is the
ratio of the annual total compensation of the CEO and the median
annual total compensation of all employees excluding the CEO;
6. Development and maintenance of more effective, rewarding, and
protective whistle-blowing policies and procedures that encourage whistle-blowers to come forward in revealing violations of
laws, irregularities, and fraud to regulators and be protected from
retaliations and be properly rewarded for their valuable information.
Exhibit 1.4 presents some important governance, financial reporting,
and auditing provisions of both SOX and DOF, and the following paragraphs describe their relevance to the audit committee.12 SOX, DOF, and
related SEC implication rules address the roles and responsibilities of public
companies board of directors including audit committees, executives, accountants, auditors, lawyers, financial analysts, and financial advisors. SOX
establishes the Public Company Accounting Oversight Board (PCAOB),
an independent regulatory structure for accountants who audit public companies, creates increased disclosure and reporting requirements to improve
reliability and transparency of financial reports, changes external auditors
relationships with their clients and audit committees, increases criminal
penalties for violations of securities and related laws and disclosure of fraudulent financial information, requires senior executives to certify financial
and internal control reports filed with the SEC, and imposes substantial and
unprecedented requirements on public companies, their directors, audit
committees officers, and auditors to improve corporate governance.
Compliance with provisions of SOX and DOF and SEC-related
implementation rules as well as listing standards of national stock exchanges has had significant impacts on the improvements of audit committee effectiveness in overseeing financial and audit processes in the
past several decades. However, these regulatory reforms alone may not
13
Exhibit 1.4
Summary of provisions of the SarbanesOxley
Act and the DoddFrank Act
Provisions
DoddFrank Act
SarbanesOxley Act
Event triggered
the passage
The 20072009 financial crisis
A wave of financial scandals

at the turn of the 21st century.
Purpose
Rebuild public trust and

investor confidence in the
financial system, which had
been eroded by a wave of
subprime mortgage and other
bank irregularities.
Rebuild investor confidence

and public trust in public
financial information and
capital markets, which had
been eroded by a rash of
financial scandals.
Proposed
implementation
rules
240 rules to be established.
11 titles that describe specific

mandates for financial
reporting.
Provisions
Say on pay, and say on golden

parachutes.
Incorporate so-called
clawback provisions into
incentive compensation
arrangements for executive
officers.
Members of the compensation
committee must be
independent.
Prohibit brokers to vote on
compensation matters.
Guiding principles for

corporate governance.
Improve the quality,
reliability, and transparency of
financial reporting.
CEOs and CFOs to certify
financial reports.
Ban on personal loans by
companies.
Mandate formation of the
audit committee by public
companies.
Affected
organizations
and individuals
Private investor groups that

oversee $150 million or more
in assets.
Financial institutions.
Nonfinancial companies.
All investors, auditors, and

organizations associated with
public companies.
Timeframe for
implementation
The majority of Related

regulations are being
implemented.
Implemented.
New entities
Financial Services Oversight

Council.
Consumer Protection Bureau.
Public Company Accounting

Oversight Board.
s uffice to improve public trust and investor confidence in public financial

information. High-quality, transparent, and reliable financial i nformation
can be produced through a robust, accountable, credible, and monitored
14
financial reporting and audit processes. Vigilant and effective audit

committees contribute to the quality of financial reports and audit functions and integrity of the capital markets. In 1999, an authoritative Blue
Ribbon Committee stated that audit committees will be more effective
in helping to ensure the transparency and integrity of financial reporting
and, thereby, maintain the investors confidence that makes our securities
markets the deepest and most liquid in the world.13 This statement is
still relevant as many individual and institutional investors rely on audit
committees as their representative to protect their interests by effectively
overseeing the reliability and integrity of financial and audit reports.
Several best practices of audit committees in addition to aforementioned
regulatory reforms have been suggested to improve audit committee effectiveness. Mike Gowell of TeamMate, in a joint project with Wolters
Kluwer, lists a 10-step plan for strengthening the audit committee: (1)
Help the audit committee focus and set priorities; (2) Provide more risk
information to the audit committee; (3) Provide more periodic trending information; (4) Ensure your materials meet audit committee needs;
(5) Pursue greater management follow-up on reporting issues; (6)Utilize
more automated reporting support; (7) Enhance reporting on internal
audit quality and performance; (8) Consider combined reporting with
other risk-and-control functions; (9) Reassess the type, nature, and frequency of internal audit communications with the audit committee chair;
and (10) Determine what types of internal audit opinions (or selective
assurance), if any, are valued by the audit committee.14
The Deloitte Audit Committee Brief of December 2014 suggests
best practices of audit committees by listing several areas for the audit
committee to focus on, including15:
1. Information Technology (IT): Ever-increasing IT creates challenges
for public companies and their audit committees as there is no
one-size-fits-all approach that covers all companies and industries;
2. Compliance with ever-changing reforms: The regulatory measures pertaining to financial reporting, internal controls, and risk assessment and
audit functions are vital to the audit committee oversight effectiveness;
3. Globalization: Globalization of businesses has created a new set of
challenges for audit committees including overseeing executives who
15
understand global finance and handling anti-corruption compliance

with reference to the U.S. Foreign Corrupt Practices Act and other
non-U.S. laws that may apply;
4. Risk oversight: Effective oversight of risk assessment and management including ensuring that management fully considers all relevant risks and that individual managers do not pursue personal goals
at the expense of the organization is becoming more important for
the audit committee;
5. Tax considerations: Tax considerations arise from the recent scrutiny
on companies shifting their profits to low tax countries, the implications of inversions, and financial statement accounting for taxes.
Other regulatory reforms and best practices relevant to the audit
committee oversight effectiveness are present in the next several chapters. Exhibit 1.5 shows audit committee formation, characteristics, structures, and effectiveness pre- and post-SOX. Exhibit 1.5 compares and
contrasts the composition, attributes, structure, and functions of the
Exhibit 1.5
Audit committee oversight effectiveness
Provisions
I. Composition
Required by the
Sarbanes-Oxley Act
of 2002 and SEC
proposed rules2003
Specific best practice

suggestions
The audit committee

1. The audit committee consists of
consists of at least three
five members.
independent members
2. All members of the audit
as determined by the
committee are independent as
following two criteria:
defined by the applicable rules and
(1) members are barred
regulations.
from accepting any
consulting, advisory, or
other compensatory fee
other than as a member of
the board; and (2) members
are not affiliated persons.
(Continued )
16
II. Functions
III.Handling
complaints
1. Enhance the
The audit committee does the
independence of audit
following:
functions.
1. Approves all audit and non-audit
2. Hire, evaluate, and fire
services.
external auditors.
2. Hires, fires, and retains
3. Responsible for
independent auditors.
the appointment,
3. Reviews and approves: (1)
compensation, retention,
budget for the internal audit
and oversight of the work
function; (2)the independent
of auditors
auditors report; and (3)
4. Approve all audit
external and internal auditors
engagement fees and
audit plan, procedures, scope,
terms and significant
and results.
non-audit engagements of 4. Arranges meetings and discusses
the independent auditor.
annual and quarterly financial
5. Review of financial
reports with management and
statements.
independent auditors.
6. Assessment of risks and
5. Receives required information
vulnerabilities.
regarding auditor independence.
7. Oversight of external and 6. Has private meetings with
internal audits.
external and internal auditors.
7. Provides external and internal
auditors with unrestricted access
to the committee.
8. Has unrestricted access to all
company records.
9. Reviews management: (1)
strategic plans and business risk;
(2) assessment of the adequacy
and effectiveness of internal
controls; and (3)certification
of the accuracy, completeness,
and fair presentation of financial
statements in conformity with
GAAP.
10. Reviews corporate governance
principles and monitors
compliance with these principles
Establish procedures for the The audit committee should
following:
establish procedures for the receipt,
1. The receipt, retention,
retention, and treatment of
and treatment of
complaints received.
complaints received
by the company
regarding accounting,
internal controls, or
auditingmatters.
17
2. The confidential,
anonymous submission
by employees of concerns
regarding questionable
accounting or auditing
matters.
IV. Advisors
The audit committee must

have the authority to engage
outside advisors including
counsel, as it determines
necessary to carry out its
duties.
The audit committee should retain

professional outside advisors who have
no independence from management
and internal and external auditors
to assist the committee with various
financial, audit, and corporate
governance issues.
V. Funding
The audit committee must

have appropriate funding for
payment of compensation
to any:
1. registered public
accounting firm engaged
for the purpose of
rendering or issuing an
audit report or performing
other review or attest
services.
2. advisor employed by the
audit committee.
The audit committee should be:

1. adequately compensated in cash
and stock.
2. legally protected from potential
liabilities.
3. have sufficient funds
tocompensate external auditors for
audit and non-audit services and
advisors for their legal, financial
consulting.
VI. Knowledge
1. All members should have

knowledge and experience
in financial reporting and
auditing matters.
2. At least one member
of the committee is a
financial expert who:
(1) understands financial
statements, accounting
standards, internal
controls, and audit
committee functions;
and (2) has experience
with application of
accounting standards as
related to accounting
estimates, accruals
and reserves, as well as
preparing and auditing
financial statements.
1. All members of the audit

committee must be financial
experts.
2. There should be an orientation
for each member of the audit
committee.
3. Members of the audit committee
should participate regularly in
continuing education programs.
4. Members should retain
outside advisors or educational
consultants as they deem
appropriate.
(Continued )
18
VII.
Certification
1. CEOs and CFOs certify

a. completeness and
accuracy of financial
statements.
b. existence of disclosure
controls and
procedures.
c. adequacy and
effectiveness of
internal controls.
2. Management annual
report on internal
controls for financial
reporting and assessment
of those controls.
3. Independent auditors
attest to and report
on the managements
assessment of internal
controls.
1. Public companies should have

an internal audit function either
in-house or outsourced.
2. The audit committee should
review and approve internal audit
risk-based plans.
3. The chief executive auditor
(CEA) should have a direct line
of communication and reporting
responsibility to the audit
committee.
4. The CEA should meet with the
audit committee in executive
sessions. The CEA should
attend all regularly scheduled audit
committee meetings and report on
internal auditors findings.
review and approve CEOs,
CFOs certification of financial
statements, management report
on internal controls, and
independent auditors report on
managements assessment of
internal controls.
VIII. Auditor
Rotation
1. Restrict the extent

of non-audit services
provided by the auditor.
2. Limit the employment
by a company of audit
firm personnel.
3. Require five-year
rotation of partners who
have participated in the
audit.

consider rotating the accounting
firms when:
a. the firm has audited the
company for a long period of
time (e.g., over 15 years);
b. one or more former partners,
managers, or senior auditors of
the firm are employed by the
company; or
c. significant non-audit services
are provided to the company.
IX. Evaluation
Companies develop processes

to evaluate, at least annually,
the performance of their audit
committee as a whole, the
performance of each board
committee, and the performance
of each member of audit
committee.
19
X. Ethics
Oversight
The audit committee is responsible

for overseeing corporate ethics.
1. Development of corporate code
of ethics which defines ethical
standards and skills required to:
a. foster ethical practice
throughout the organization;
b. adherence to applicable laws,
rules, and regulations;
c. compliance with appropriate
accounting and auditing
standards;
d. proper whistleblowing process
to report possible ethical
violations;
e. fair resolution of conflicts of
interest; and
f. prohibit business and financial
misconduct including
fraudulent activities.
investigate and monitor
periodically the compliance with
the established code of ethics.
XI. Structure
1. The audit committee adopts

the required written audit
committee charter that describes
structure, duties, responsibilities,
functions, and composition of the
committee.
2. It evaluates its charter on an
annual basis.
3. It meets at least four times a year.
4. It adopts corporate governance
guidelines pertaining to the audit
committee.
audit committee as required by SOX and the SEC-related implementation rules with those of suggested best practices (benchmarks). The most
noticeable differences are: (1) SOX and SEC rules require a minimum of
three independent members of the audit committees, whereas the benchmark suggests five independent members; (2) SOX requires that at least
one member of the audit committee be designated as a financial expert, while the benchmark suggests all members of the audit committee
20
be financial experts; (3) SOX requires rotation of the lead audit partner
once every 5 years, whereas the benchmark suggests rotation of audit firm
when there is a combination of circumstances that could impair the audit
firms independence from management.
Best practices of the audit committee suggested in Exhibit 1.5 indicate
that the audit committee : (1) be composed of five members that are independent and free from any consulting, advisory, or any other compensatory
fee other than as a member of the board; (2) provide a 5-year rotation of
audit committee members to evaluate independence from management;
(3)appropriately fund the payment of compensation of external auditors;
(4) establish procedures for treatment of complaints and confidentialityw
including whistle-blowing policies and procedures; (5) have knowledge and
experience in financial reporting and disclose that at least one member of
its audit committee is a financial expert; and (6) adopt the required written audit committee charter that describes structure, duties, responsibilities,
functions, and composition of the committee.
In compliance with regulatory reforms and best practices, many
public companies disclose relevant information regarding their audit
committees. Corporate disclosures and the right balance between disclosure efficiency and disclosure overload will continue to be a big challenge
for public companies and their audit committees as the SEC currently
addresses corporate disclosure and companies try to find the best way to
communicate with their shareholders. Corporate disclosure effectiveness
has been and continues to be an area of intensive focus by the Securities
and Exchange Commission (SEC) as evidenced in its current initiatives
to identify gaps in information relevant to investors and to facilitate the
disclosure of useful information to investors (SEC, 2015).16
Fundamentals of Audit Committees

The audit committee as a standing committee of the companys board of
directors plays an important role in ensuring the effectiveness of corporate
governance, reliability of financial reports, and quality of audit functions. The
audit committee oversight effectiveness depends on its robust fundamentals and its independence. To be independent, audit committee members
should not accept any direct or indirect compensation from the company
other than compensation for service as director. Audit committee members
21
must be selected from the companys board of directors and they must be
independent.17 Independent directors serving on the audit committee are
barred from: (1) accepting any direct or indirect (e.g.,spouses, children)
compensation (consulting, advisory) except for their service on the board
and (2) any affiliation with the company or its subsidiaries except for board
and board committee participation.18 The board of directors (not the CEO)
should appoint the chair of the audit committee and other independent
members of the audit committee. The audit committee should be given the
authority to appoint its own financial advisors and service providers. Some
of meetings of the audit committee should be held with only the committee
members and any deliberations be presented to and approved by the entire
board of directors. The process by which audit committee members and the
chair are selected should be properly disclosed to shareholders.
The audit committee oversight effectiveness depends on the culture,
attitude, philosophy, and practices of the entire board of directors in general and the audit committee in particular. The audit committees financial
reporting oversight function involves monitoring the reliability, integrity,
quality, and transparency of the financial reporting process without assuming managerial functions and decisions relevant to the preparation of
financial statements.19 To effectively fulfill their oversight responsibilities,
audit committee members must be professionally qualified, operationally
knowledgeable, functionally independent, and financially literate.20 The
audit committee should meet regularly and, as needed, with the companys board of directors and officers including the CEO, the chief financial officer (CFO), treasurer, controller, and other corporate gatekeepers
including the director of the internal audit function, external auditors,
and general counsel. The committee should meet with all corporate gatekeepers, directors, and officers both individually and collectively to review
and assess the quality, integrity, transparency, and reliability of financial
reports, effectiveness of internal controls, and the credibility of audit
functions.21
The KPMG 2015 Audit Committee Guide discusses the required
and suggested committee composition, on-boarding processes, and
the role of the chair. The NYSE and NASDAQ listing rules require a
minimum of three members, though most audit committees have on
average three to five independent members. The NYSE lists further requirements for people serving on multiple audit committees to ensure
22
no impairment in the persons ability to serve. Each director must be

independent, meaning that the board determines there is no material relationship with company (NYSE) or relationship that would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director (NASDAQ). The SEC also requires satisfaction of the enhanced d
efinition of audit committee independence,
prohibiting the director from receiving any compensation other than
director fees and from being an affiliated person of the company or
any subsidiary.
Some companies use the SECs rules for all independent directors to
avoid two levels of independence. Both stock exchanges require that all
members be financially literate. Under NYSE this is left to the board,
while NASDAQ defines it as the ability to read and understand the
basic financial statements.22 Both stock exchanges also require what the
SEC rules specifically call an audit committee financial expert, which
is defined as a person who understands accounting standards, policies,
and practices and financial statements, auditing, internal control over
financial reporting, and audit committee functions. Many companies
typically have more than one audit committee financial experts. The
committee chair is vital to the committees effectiveness and accountability, since he must set clear expectations for all involved parties and
facilitate the main goal of the audit committeeensuring quality financial reporting.23
Arthur Levitt, former Chairman of the SEC, for years prior to recent
financial scandals and crises and regulatory responses, directed companies
attention to the importance and relevance of the audit committee. In 1998,
Levitt stated that effective oversight of the financial reporting process depends, to a very large extent, on strong audit committees; qualified, committed, independent, and tough-minded audit committees represent the
most reliable guardians of the public interest ... this time for bold action.24 The passage of the SOX in 2002 put more responsibility on the
audit committee for protecting investors from receiving misleading financial information and ineffective audit reports. In 2013, Paul Beswick, the
chief accountant at the SEC, stated that overseeing the audit process is an
important responsibility that the audit committee has to fulfill in order to
protect the interests of investors. Inherent in vesting the audit committee
23
with this responsibility is the tacit acknowledgment that the audit committee is best-positioned to determine whether the auditor is providing a high
quality audit.25
Structure of an Audit Committee

The proper structure of the audit committee influences its effectiveness as
investor protectors. The audit committee as a standing committee of the
board of directors facilitates: (1) the board of directors exercising oversight responsibility in the areas of financial reporting, risk assessment,
internal control, and audit activities, which permits the board to oversee other strategies, business, and decision-making activities of management; (2) management to effectively discharge its financial reporting, risk
management, and internal controls responsibility; (3) both internal and
external auditors to maintain their independence and objectivity and improve their audit quality, efficiency, and effectiveness; (4) compliance with
applicable rules, regulations, and standards set by lawmakers, regulators,
and standard setters; and (5) protection of investors and other stakeholders by aligning their interests with those of management.
To be an effective integral component of corporate governance, the
audit committee must: (1) be independent to perform an objective assessment of financial statements; (2) add value to corporate governance
participants decision making through ethnic and gender diversity, which
provides a range of perspectives; (3) be skilled and experienced with the
challenges of the positions of management, the independent auditor, and
internal auditor; (4) be composed of members with various backgrounds
whether in finance, accounting, or legal backgrounds; (5) be able to meet
other audit committee members and attendees including general counsel,
CEO, and chief compliance officer (CCO).
There are four areas the audit committee has spent more time on in
the aftermath of the 20072009 global financial crisis. These audit committeefocused areas are IT risk and emerging technologies, risk management, corporate strategy, and the impact of public policy initiatives.26
One important issue that companies face is the risk involved in IT and
other emerging technologies. The 2011 Audit Committee Member Survey found that 61 percent of respondents said they are satisfied with their
24
process to oversee IT risk, and they rank the quality of the information
they receive about IT risk the lowest among all categories.27 They also
stated that they would like to communicate with the chief information
officer (CIO) concerning the rapid growth in IT.
Second, audit committees should communicate with the chief risk
officer (CRO) about the companies risk management. From the 2011
Audit Committee Member Survey, only 34 percent were satisfied on the
views about the companys risk environment and other related controls.
The audit committee should oversee assessment and management of both
internal risks such as strategic, governance, and external risks including
bribery, fraud, cybersecurity, and the supply chain.
Innovation and growth plans are the third challenges for audit
committees. Audit committees look to see if companies have effectively
identified risks to their growth plans and implemented controls to monitor them. Along with building a strategy to grow and innovate, audit
committees continue to pay considerable consideration to the compliance, controls, and risk and reporting issues in a company. Finally, current legal/regulatory mandates such as the DoddFrank whistle-blowing
rules will continue to consume time and attention from audit committee
members to ensure compliance and assurance of financial statements.
Audit Committee Oversight Functions

The audit committee has ultimate responsibility for financial reporting,
internal control, and auditing and risk oversight. The audit committee
should review the established accounting and internal control systems,
review a companys risk management philosophy and risk appetite, review
the assessment on the effectiveness on internal controls and risk management, and regularly review the financial reporting process, internal
control systems, and the auditing process, as well as risks in relation to
the risk appetite. In overseeing the financial reporting, internal controls,
audit process and risk profile, the audit committee should consider the
financial reporting attributes, internal control activities, dynamics of the
company, its industry and corporate governance measures, and any systemic risks. Effective oversight requires regular, effective, and meaningful communication between the audit committee, management, and the
25
auditors. The audit committee should disclose to shareholders, at least annually, sufficient information to enable them to assess whether the audit
committee is carrying out its financial, auditing, internal control, and
risk oversight responsibilities effectively. The audit committee oversight
of risk management is gaining considerable attention in the aftermath of
the 20072009 global financial crisis.
It is important to keep in mind that audit committees are not
seen as a burden for the company, but instead as opportunities to
maximize profits and reduce risks. The audit committee should have
a thorough understanding of the business and the financial accounting policies and procedures.28 It is important for committee members
to be updated on company accounting policy changes. The committee should be given adequate resources and authority to effectively
discharge its oversight responsibilities. To become effective in audit
committee responsibilities, members must be able to monitor the financial reporting process, the effectiveness of internal audit, and the
statutory audit.29
It is the managements duty to prepare a complete and accurate fi
nancial
statement in accordance with financial reporting standards, and audit committees should provide assurance for the financial reporting process. Accounting policies, judgments, and estimates are called for in the statements;
therefore, it is important for committee members to monitor the reliability
and relevance to be confident with the changes made. Monitoring the effectiveness of internal control and risk management systems help maximize
opportunities and minimize potential losses. Internal controls are one of the
principal means by which risk is managed; therefore, it is critical for audit
committee members to evaluate these risks. Receiving reports from management on the systems helps establish the degree to which management has
assumed ownership for risk and control, whether the controls are fit for purpose, identifiable key business risks, rigor, and comprehensive review process.
In addition, establishing and maintaining an effective internal audit
function aids in ensuring that the internal audit function has adequate resources and access to information to enable it to fulfill its mandate and is
equipped to perform in accordance with appropriate professional standards
for internal auditors. Lastly, reviewing the audit plan should determine if an
appropriate audit plan is in place. To appropriately analyze the audit plan,
26
the board members should understand where the statutory auditor performs substantive testing, whether divisions receive adequate c overage, and
whether audit firms are involved in auditing specific geographic locations.
The audit committee as a standing committee of the board of
directors is accountable to the board, and as a representative of shareholders is accountable to shareholders. Accountability of the audit
committee encompasses the requirements for having a written charter
that provides for an annual review and evaluation of the entire audit
committee and each of its members and review of its membership and
relationships with the companys board, management, internal auditor, and independent auditor. Formal review and evaluation of an audit
committees performance can be provided through self-evaluation and
assessment by the board, senior executives (CEO, CFO), the internal
auditor, the independent auditor, e xternal evaluation service providers,
or a combination thereof.
The audit committee as a standing committee of the companys board
of directors is an important component of the corporate governance
structure designed to protect shareholder interests. The audit committee is viewed by many as representative of shareholders, on behalf of the
board of directors, and the ultimate guardian of stakeholder interests,
investor protection, and corporate accountability.30 Arthur Levitts call
several years ago for bold action on audit committee as guardians of the
public interest is now more relevant and appealing than ever before in
light of new corporate governance reforms.31 Audit committee effectiveness is a continuous process in light of increasing complexity of business and risk, and the need for the audit committee engagement in the
companys strategy, its risk, and sophistication of the financial, internal
control, and audit processes.
Effective Oversight Dos
The primary oversight effectiveness of the audit committee depends on
the audit committee engagements with other directors, executives (CEOs,
CFOs), legal counsel, and investors in strategic planning, business and financial risk assessment, financial reporting, and audit activities outside of boardroom meetings. Other factors such as the audit committee composition,
27
diversity, dynamics, quality and quantity of meetings, workload, resources,

and quality of information shared with the audit committee influence its
effectiveness.
KPMG suggests the following 10 to-dos for the audit committee32:
Stay Focused on the Audit Committees Top Priority
The primary oversight function of the audit committee is in the area of
financial reporting and internal control risks. With the ongoing economic
uncertainty and volatility, audit committee members agenda focus on the
issues required to keep financials reliable and bias-free and related internal
controls risk-free as possible. There will be more attention and regulatory
requirements for audit committees to undertake; therefore, more challenges and flexibility will be on their agenda.
Prepare and Monitor Accounting Changes, Judgments,
and Estimates
The financial reporting process is moving toward a globalized and standardized
framework guided by a set of globally accepted accounting principles. While
the U.S generally accepted accounting principles (GAAP) and International
Financial Reporting Standards (IFRS) are now converging in important accounting issues on revenue recognition, leases, financial instruments, and
insurance, it is critical for audit committees to keep up and monitor companies global financial reporting changes and challenges. Furthermore, audit
committees must understand how these accounting changes will impact the
company such as implementation/resources and IT system requirements.
The range of these judgments and estimates can become rather difficult due
to all possible outcomes, so it is vital for committee members to understand
managements framework to determine if they have proper controls in place.
Consider Whether the Financial Statements and Disclosures tell the
Companys Story
Completeness, accuracy, and reliability of financial reports have been and will
continue to be value-relevant to investors. Investors also pay attention to the
28
transparency of financial reports. Committee members should consider how

fair and full disclosure of financial information can be improved to better
meet investor expectations. In recent years, management also voluntarily disclosed earnings forecasts as well as nonfinancial information on governance,
social and environmental performance. The audit committee should review
and approve disclosures of both mandatory financial and voluntary nonfinancial information disseminated to investors and other external users of reports.
Focus on the Companys Plans to Grow and Innovate
Companies search for growth, strategy, and innovations when looking
beyond the recessionary environment. The key challenge takes place
when monitoring and calibrating growth plans to appropriately balance
the risk and rewards. Companies need to discuss with audit committee
members together to hinge on the other.
Reassess the Companys Vulnerability to Business
Interruption, and its Crisis Readiness
The emergence of cyberattacks and cybersecurity breaches demands that
the audit committee set a right tone at the top in making cybersecurity a priority. The audit committee should ask management whether
the companys crisis response plan is robust and ready to effectively and
timely respond to surprises. Committee members need to confer with
management on the what-if scenarios from supply chain links and
financial health of vendors to geopolitical issues, natural disasters, and
cyber threats.
Understand How Technology Change and
Innovation are Transforming the Business Landscape
Information technology risks are increasing rapidly, forcing companies to
address critical challenges today. Audit committees must devote more and
more attention to compliance, data privacy, and system implementation.
Communications with the CIO may elevate IT discussions, help frame
the big picture view of the companys IT governance efforts (social media
29
and data security), clarify the audit committee and other committees,
and strengthen the boards understanding of IT through education and
bringing IT specialists on board.
Focus on Asymmetric Information Risk and Seek Out
Dissenting Views
Audit committee members should make time to visit company facilities and
attend employee functions to see what internal auditors, third parties, business unit leaders, and external auditors say about their company. Proper audit
committee orientation and understanding the corporate culture and business
environment and processes assist the audit committee to determine challenges and opportunities relevant to the company and review consistency and
risk recognition. Over-reliance on senior management promotes a culture of
candor and constructive skepticism, raises red flags, and welcomes challenges.
Consider the Impact of the Regulatory Environment
on Compliance Programs and Business Plans
In the ever-increasing regulatory environment, compliance has become
an important oversight function of the audit committee. The audit committee members promote attention on conflict minerals and compensation clawbacks. They must heavily focus on other compliance challenges
posed by the Foreign Corrupt Practices Act, the UK Bribery Act, the
SECs whistle-blower bounty program, and the DoddFrank provisions.
The right tone at the top and throughout the organization is critical in ensuring compliance with applicable laws, rules, regulations, and standards.
Understand the Companys Significant Tax Risks
and How they are Being Managed and Modeled
Significant compliance and financial risks are affected by prospects for
business tax reform, ongoing assessment of uncertain tax positions, increased state, federal, and global enforcement activities, and continued
complexity of operating globally in different tax regimes. For audit committee members to stay abreast on tax risks, they must establish a clear
30
communication protocol for management to update the audit committee

on the status of its tax risk management activities. They must ensure the
tax function is monitoring the federal tax reform debate and the impact of
various tax legislations.
Monitor the Pcaobs Initiatives on Auditor
Independence and Transparency, and Consider
the Implication for the Audit Committee
Audit committee communication with those in charge of governance of
the company is vital to the effectiveness and sustainability of the audit
committee in fulfilling its oversight responsibility. The regulators initiatives including those of the SEC and the PCAOB, as discussed in the
next chapters, designed to promote auditor independence, objectivity,
and professional skepticism have potentially significant implications for
the audit process and the role of the audit committee. The members must
set clear expectations with management and auditors for staying abreast
of these projects and communicating their potential impact on the audit
and the audit committees oversight.
Collaboration with Chief Compliance Officer
Ever-increasing rules and regulations governing the financial reporting process and audit activities require the audit committee to work with the companys Chief Compliance Officer (CCO) and internal auditors in optimizing
and prioritizing compliance activities. Several laws including SOX of 2002,
DOF of 2010, and JOBS Act of 2012 were enacted to protect investors from
receiving materially misstated financial reports. The SEC has stepped up its
rules in implementing various provisions of these laws and its enforcement
actions in ensuring proper compliance with these laws and regulations by
public companies. The PCAOB is also developing auditing standards for
auditors of public companies and conducting inspections to ensure compliance with these standards. The audit committee should work with both the
CCO and the internal auditors to lead their organizations toward optimization of compliance activities and better alignment of priorities by focusing
on both efficiency and effectiveness in achieving the organizations goals.
31
In todays regulatory, enforcement, and legal environment, the audit

committee should focus its efforts on optimizing compliance by integrating efficiently and effectively, identifying risks, and establishing control
activities testing controls to achieve greater comfort with less effort. Optimization enables the audit committee to streamline compliance activities
and develop a sustainable framework for optimizing compliance efforts.
The audit committee now faces challenges of the global, economic, and
political uncertainty and volatility as well as regulatory and compliance
risks.
Conclusion
The 20072009 global financial crisis was caused by many factors
including ineffective and inefficient regulations, the subprime mortgage
debacles, lack of transparency among financial institutions, highly leveraged banks, greed and incompetence of executives, and global imbalances of rising asset prices. The effects of the financial crisis have been
far reaching, not only in the United States, but also in Europe and Asia.
Overriding effects include global economic meltdown, increased unemployment rates, insufficient economic growth, and significant numbers
of home foreclosures, government deficits, and substantial business and
bank failures. The 20072009 global financial crisis also underscores the
importance of the role that global regulations can play in ensuring stability of international financial markets and thus protection of consumers
and investors.
The audit committee in the past two decades has made a significant
progress from being voluntarily formed as a liaison between management
and external auditors to preserve audit independence to now as an effective oversight function of the financial reporting and audit process,
internal control, risk management, and the compliance and ethics. Many
events and regulations have underscored the importance and relevance of
the audit committee including financial scandals of Enron, Global Crossing, WorldCom, among others at the turn of the 21st century, the passage
of SOX in 2002, the 20072009 global financial crisis, the DoddFrank
Act of 2010, and the most recent cybersecurity attacks. These events and
regulations set higher standards for the audit committee in overseeing
32
financial and auditing processes to ensure protecting investors from

receiving materially misstated financial information. The audit committee is an integrated component of the corporate governance structure and
as such its effectiveness depends on the overall effectiveness of corporate
governance. Some of the factors that may influence the audit committee
effectiveness are independence of the members from executives, technical and financial competency, communication skills, and willingness to
interact with other board members, executives, legal counsel, internal
and external auditors, and investors, and authority and resources to hire
advisors.
Action Items
1. Revise your audit committee charter to ensure compliance with all
applicable laws, regulations, rules, standards, and best practices.
2. Understand and communicate to all corporate governance participants the important role that the audit committee plays in overseeing
the reliability and integrity and quality of financial and nonfinancial
corporate reports.
3. Ensure that your audit committee is in charge of hiring, firing, compensating, and overseeing the work of external auditors.
4. Make your audit committee an integrated component of the corporate governance structure.
5. Ensure your audit committee has the required qualification to fulfill
its oversight effectiveness.
6. Ensure your audit committee is independence as defined by the
SEC, has technical and financial competency, possesses communication skills, and has willingness to interact with other board
members, executives, legal counsel, internal and external auditors
and investors, and has the authority and resources to hire advisors.
7. Form your audit committee in compliance with all applicable
laws, rules (SOX, DOF), regulations (SEC), and standards (NYSE,
NASDAQ).
8. Ensure your audit committee oversees how auditors are appointed,
what kind of work they are allowed to do, and their fees.
33
9. Make sure your audit committee discusses with the internal auditors
and the independent registered public accountants the overall scope
and plans for their respective audits, including the adequacy of staffing and budget or compensation.
10. The audit committee should review and discuss the quarterly financial statements, including Managements Discussion and Analysis of
Financial Condition and Results of Operations, with management
and the independent registered public accountants prior to the filing
of the Companys wQuarterly Report on Form 10-Q.
11. The audit committee should conduct a review of integrated financial
and internal control reporting (IFICR) including executive certifications of financial statements and internal controls and audit reports
on financial statements and internal controls.
12. The audit committee should interact and communicate with other
corporate gatekeepers including other board members, management, external auditors, internal auditors, legal counsel, and others
in charge of governance.
Endnotes
1. The term audit committee(s) used in these three volumes is referred
to those charged with oversight of financial reporting, internal controls, and the audit process.
2. Much of this discussion regarding the formation, composition,
structures, fundamentals, and functions of the audit committee
throughout this and other chapters has been adapted from Rezaee,
Z. 2006. Audit Committee Oversight Effectiveness Post-Sarbanes-Oxley
Act. Brooklyn, NY: Tax Management Inc. (BNA Publications).
3. Rezaee, Z. 2011. Financial services firms: Valuations, mergers and acquisitions (3rd ed.). New York, NY: John Wiley and Sons.
4. Ibid.
5. Ellwood, S., & Lacalle, J. 2013. An Oversight Body for Local Public
Audit: Protector of the Public purs or an Unnecessary expense? Available at: https://research.mbs.ac.uk/accounting-finance/Portals/0/docs/
An%20oversight%20body%20for%20local%20public%20audit.pdf
34
6. Epstein, B., & Vullmahn, E. 2010. Russel Novak & Co. LLP. 5 Way Audit
Committees Can Rebuild Public Trust. Available at: www.law360.com/
articles/178080/5-ways-audit-committees-can-rebuild-public-trust
7. Ibid.
8. Financial Accounting Standards Board (FASB). 2015. Statement
of Financial Accounting Concepts No. 2 Qualitative Characteristics of Accounting Information. Available at: https://asc.fasb.org/
imageRoot/23/73531923.pdf
9. Sarbanes-Oxley Act (SOX) 2002, Pub. L. 107-204, enacted July 30,
2002, adding 15 U.S.C. 7201 et seq.
10. Ibid.
11. Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010. 2010. (pp. 111203). Pub. L.
12. For a more in-depth discussion of provisions of Sarbanes-Oxley Act
addressing corporate governance, the financial reporting process,
and audit functions, see: Rezaee, Z. 2004. Corporate Governance
Role in Financial Reporting. Research in Accounting Regulation
17:107149.
13. Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (BRC). 1999. Report and Recommendations
of Blue Ribbon Committee on Improving the Effectiveness of Corporate
Audit Committees. New York, NY and Washington, DC: NYSE and
NASDAQ.
14. TeamMate and Wolters Kluwer. 2015. Audit Technology Insights:
Strengthen Audit Committee Value: A 10-Step Approach. Available
at: https://na.theiia.org/standards-guidance/Public%20Documents/
Strengthen-Audit-Committee-Value-a-10-step-Approach.pdf
15. Deloitte. 2014. Audit Committee Brief, November/December. Available at: www2.deloitte.com/content/dam/Deloitte/us/Documents/
audit/us_aers_ACB_2014%20nov%20dec.pdf
16. The Securities and Exchange Commission (SEC) recently has taken
initiatives to modernize public company disclosure (SEC, 2013).
On September 25, 2015, the SEC published its first request for
comment from the disclosure effectiveness initiative (SEC, 2015).
Securities and Exchange Commission (SEC). 2015. Request for
comment on the effectiveness of financial disclosures about entities
other than the registrant. Release No. 33-9929; 34-75985; IC-31849;
35
File No. S7-20-15 (September 25, 2015). Available at: www.sec

.gov/rules/other/2015/33-9929.pdf
17. Sarbanes-Oxley Act (SOX) 2002, Pub. L. 107-204, enacted July 30,
2002, adding 15 U.S.C. 7201 et seq, Section 301(3)(a) and (b):
18. Ibid.
19. Rezaee, Z. 2004. Corporate Governance Role in Financial Reporting. Research in Accounting Regulation 17: 107149.
20. Ibid.
21. Ibid.
22. KPMG. 2015. Audit Committee Guide. Chapter 2: Composition, onboarding, and the role of the chair. P. 3-8. Available at:
https://boardleadership.kpmg.us/content/dam/blc/pdfs/2015/
kpmg-audit-committee-guide-2015.pdf
23. KPMG. 2015. Audit Committee Guide. Chapter 2: C
omposition,
onboarding, and the role of the chair. P. 3-8. Available at:
https://boardleadership.kpmg.us/content/dam/blc/pdfs/2015/
kpmg-audit-committee-guide-2015.pdf
24. Levitt, A. 1998. Chairman of the Securities and Exchange Commission. The Numbers Game, New York, NY: NYU Center for
Law and Business (September 28). Available at: www.sec.gov/news/
speech/speecharchive/1998/spch220.txt
25. Paul Beswick, SEC Chief Accountant. 2013. Remarks at the AICPA
2013 Conference on Current SEC and PCAOB Developments
(December 9, 2013). Available at: www.sec.gov/News/Speech/
Detail/Speech/1370540488257
26. Duffy, T., & McCarthy, M. 2011. Where Does the Audit Committee Want to Spend More Agenda Time. Audit Committee Roundup.
27. Ibid.
28. Ernst, & Young. 2012. Audit Committees: Going Beyond the
Ordinary. BoardMatters Quarterly. Available at: www.de.ey.com/
US/en/Issues/Governance-and-reporting/Audit-Committee/BoardMatters-Quarterly--June-2012---Audit-committees---going-beyond-the-ordinary
29. KPMG, ecoDa. 2011. Audit Committee Guidance for E
uropean
Companies. Available at: www.cgov.pt/images/stories/ficheiros/
ecoda%20guidance%20on%20audit%20committees%20%20final.pdf
36
30. Rezaee, Z. 2002. Financial Statement Fraud: Prevention and Detection. New York, NY: John Wiley & Sons.
31. Levitt, A. 1998. Deloitte. Audit Committee Brief. 2012. Available at: www
.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/
us_aers_ac_brief_05022012.pdf
32. KPMG. 2011. Ten To-Dos for Audit Committees in 2012. Audit
Committee Institute. Available at: www.kpmg.com/Global/en/
IssuesAndInsights/ArticlesPublications/Lists/Expired/aci-10-todos-2012.pdf
Index
Accountability, 38
of audit committee, 26
reforms, 119
Accounting advisor, 6
Accounting Series Release (ASR)
No. 123, 39
Accounting Series Release (ASR)
No. 19, 39
Administrative process, of audit
committee, 162
Agency theory, 102
Allen, William, 118
American Institute of Certified Public
Accountants (AICPA), 39,
5457
Audit Committee Toolkit, 55
communication, guidance for,
5556
Audit committee, 13
advisors, 114
attributes of, 38, 8190
authoritative guidelines and best
practices of, 4071
authority, 114115
best practices, 6771
with board of directors, 100101
charter. See Charter, audit
committee
compensation, 115116
composition, 100101,
120122, 124
determinants of, 9495, 9699
effectiveness of, 26, 9395
evolution of, 3940
with external auditors, 106109
financial experts, 135138
functions of, 2431
fundamentals of, 2023
funding, 115116
guidelines and aspirations, 134135
independence, 120, 128134
with internal auditors, 103106
legal obligations, 116120

with management, 101103
meeting, 125128
agenda, 163167
attendance, 168169
members
continuing professional education
of, 151152
selection of, 148151
self-assessment, 169170
time commitment and rotation, 169
minutes, 162163
operations of, 9093, 152
oversight
effectiveness, 1519, 2021,
2630
functions of, 160162
responsibilities of, 169
responsibility of, 38, 4142
pre- and post-SarbanesOxley Act, 10
in public companies, 37
public trust and investor
confidence, rebuilding of, 4, 5
PwC lists, for practice, 6869
regulatory requirements for, 720
reporting, 138139
resources, 113139
size, 122124
sources and drivers of, 3771
special committee on, 54
structure of, 2324, 7881
suggestions for competent, diligent,
and effective, 151152
Audit Committee Collaboration
Group, 167
Audit Committee Disclosure Rules,
5051
Audit Committee Effectiveness
Center (ACEC), 55
Audit Committee Matching System, 55
Audit Committee Meeting
Planner, 163
174 INDEX
Audit Committee Member Survey,

2324, 122
Audit committee oversight
effectiveness (ACOE), 9395
Audit functions, 2
internal, 25
Auditing Standard No. 16, 62, 116
Auditing Standard No. 17, 65
Auditing Standard No. 7, engagement
quality review, 6567
Auditing Standards Board, of
AICPA, 44
Auditing Standards Executive
Committee, 54
Beswick, Paul, 22, 47, 49
Blue Ribbon Commission (BRC),
4346
Blue Ribbon Committee, 14, 39, 129
Certified Public Accountants
(CPAs), 55
Chambers, Richard, 106
Charter, of audit committee
establishing guidelines, 153154
General Motors (GM) Corporation,
154158
governing operations, 152153
well-developed, 154
Chief audit executive (CAE),
103104
Chief compliance officer (CCO), 23
collaboration with, 3031
Chief executive officer (CEO), 12, 21,
149, 151
meetings attendance of, 168
Chief financial officer (CFO), 21, 129
role of, 166167
Chief information officer (CIO),
24, 92
Chief risk officer (CRO), 24
Committee of Sponsoring
Organizations (COSO),
4041, 42
framework, 103
Conference Board, 148
Continuing professional education
(CPE), 151152
Corporate disclosure, 20
Corporate governance, 2, 20, 46, 56,
77, 81, 102, 103, 119, 135
Corporate library, 135
Cyber security, 28, 4950, 9192, 99
Cybercriminals, types of, 50
Decision-making process, 118
Deliberative process, of audit
committee, 162
Deloitte Audit Committee Brief,
1415
DoddFrank Act (DOF) (2010), 30,
147, 160
provisions for audit committees,
1112
and SarbanesOxley Act, provisions
of, 13
DoddFrank whistle-blowing
rules, 122
Duty of care, 118119
Duty of loyalty, 117118
Earnings management, 120121
Engagement quality reviewer, 6667
External auditor, 98, 106109, 129
EYs Audit Committee Member
Toolkit, 170
Federal Deposit Insurance Company
Improvement Act (FDICIA),
39, 4647
Federal Deposit Insurance Corporation
(FDIC), 4647, 157
Financial expert, 122123, 135138
definition of, 22, 51
education and experience of,
5152
Financial markets, 3
Financial reporting, 4, 20, 21, 22,
98, 102
Financial statements, 25
audit committees review of,
161162
Five-point litmus test, 106
Foreign Corrupt Practices Act
(FCPA), 29, 69
Form 10-K, 169
INDEX
175
General Motors (GM) Corporation,

154, 155158
Generally accepted accounting
principles (GAAP), 27, 51,
108, 136, 137, 162
Global financial crisis, 2
Globalization, 1415
Governance Metrics International
(GMI), 81, 90, 154
Gowell, Mike, 14
Independence Standards Board
(ISB), 156
Independent auditor, 39, 47, 107
Independent directors, on audit
committee, 21
Industry-specific training, 6
Information technology (IT), 14,
9192, 93
risk involved in, 2324, 28,
121122
Integrated audit, 125
Internal auditor, 98, 103106
International Accounting Standards
Board (IASB), 80
International Financial Reporting
Standards (IFRS), 27, 92
Internet protocol (IP), 92
Interview
for audit committee member,
149150
insights gathered from, 158159
JOBS Act (2012), 30
KPMG, 119, 126, 167
about audit committee agenda, 166
audit Committee Guide (2015), 21
to-dos for, 2730
Audit Committee Institute,
158159
Legal obligations, 116120
fiduciary duty, 117119
legal liabilities, of audit committees,
119120
Levitt, Arthur, 22, 26
Liddy, J., 127
Macroeconomic factors, 4
Microeconomic factors, 4
National Association of Corporate
directors (NACD), 148
National Association of Securities
Dealers (NASD), 44
National Association of Securities
Dealers Automated
Quotation Market
(NASDAQ), 147, 148, 153
154, 169
audit committee independence
requirements, 131
and NYSE, 5960
stock exchange, 2122
National Commission on Fraudulent
Financial Reporting. See
Treadway Commission
Report
National stock exchanges, 7, 12, 57,
115, 123
New York Stock Exchange (NYSE),
39, 44, 49, 90, 147, 148,
153154
audit committee independence
requirements, 130131
Market LLC (NYSE MKT LLC), 58
and NASDAQ, 5960
stock exchange, 2122
Proxy statements, 49, 52, 138139
Public Company Accounting
Oversight Board (PCAOB),
12, 30, 55, 6167, 70, 99
audit inspection, 62
deficiencies, types of, 6667
in firms, 66
process, 6465
reports, public portion of, 63
results, discussions about, 64
quality control criticisms,
6364
Public financial information, 3
investor confidence and public trust
in, 35
process evaluation for reviewing, 6
PwC, 99, 128
176 INDEX
Safe harbor rule, 136

SarbanesOxley Act (SOX) (2002), 1,
79, 12, 40, 46, 113,
123, 153
audit committee, requirements to,
11, 1920
Blue Ribbon Committee,
extends, 129
and DoddFrank Act, provisions
of, 13
provisions relevant to, 47
requirements under, 48
and SEC independence
rules, 130
section 301 of, 113, 114, 115, 130
section 407 of, 122, 123, 135
Securities and Exchange Commission
(SEC), 11, 12, 20, 22, 30, 41,
99, 106, 120, 135
in ASR No. 123, 39
in ASR No. 19, 39
audit committee
final rules on, 47, 4954,
122123
member requirements for, 19
on financial experts, 136
section 303A.07(b)(i)(F), 58, 61
section 303A.07(b)(i)(E), 58
section 303A.07(b)(i)(H), 61
Shareholders, 117
annual meeting of, 151
audit committee discloses to, 25
Spencer Stuart Board Index (SSBI),

121, 127, 137138
Statement of Financial Accounting
Concepts, 5
Statement on Auditing Standards
(SAS) No. 61, 39, 55
(SAS) No. 71, 55
(SAS) No. 90, 44, 5455
Statements on Auditing Standards
(SAS) No. 104111, 108
Stock exchange, 81
listing standards, 5761
Tax considerations, 15
Tax function, 30
Transparency report, 128, 138
Treadway Commission Report, 39,
4043
Two-way communication, 5657, 128
UK Bribery Act, 29
U.S. Financial Accounting Standards
Board (FASB), 80
U.S. Foreign Corrupt Practices Act, 15
Whistle-blower programs, 51
White, Mary Jo, 49
Wolters Kluwer, plan for
strengthening audit
committee, 14
OTHER TITLES IN OUR FINANCIAL ACCOUNTING

AND AUDITING COLLECTION
Mark S. Bettner, Bucknell University and
Michael P. Coyne, Fairfield University, Editors
Executive Compensation: Accounting and Economic Issues by Gary Giroux
Using Accounting and Financial Information: Analyzing, Forecasting, and
Decision-Making by Mark Bettner
Pick a Number: Internationalizing U.S. Accounting by Roger Hussey and Audra Ong
International Auditing Standards in the United States: Comparing and Understanding
Standards for ISA and PCAOB by Asokan Anandarajan and Gary Kleinman
Accounting for People Who Think They Hate Accounting by Anurag Singal
Accounting for Fun and Profit: A Guide to Understanding Financial Statements
byLawrence Weiss
Audit Committee Formation in the Aftermath of the 20072009 Global Financial Crisis,
Volume II: Responsibilities and Sustainability by Zabihollah Rezaee
Audit Committee Formation in the Aftermath of the 20072009 Global Financial Crisis,
Volume III: Emerging Issues by Zabihollah Rezaee
Announcing the Business Expert Press Digital Library

Concise e-books business students need for classroom and research
This book can also be purchased in an e-book collection by your library as

a one-time purchase,
that is owned forever,
allows for simultaneous readers,
has no restrictions on printing, and
can be downloaded as PDFs from within the library community.
Our digital library collections are a great solution to beat the rising cost of textbooks. E-books can
be loaded into their course management systems or onto students e-book readers.
The Business Expert Press digital libraries are very affordable, with no obligation to buy in future years.
For more information, please visit www.businessexpertpress.com/librarians. To set up a trial in the United
States, please contact sales@businessexpertpress.com.

Chapter 1

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 1

Uploaded by

Copyright:

Available Formats

Audit Committee

Audit Committee Formation in the Aftermath of the 2007-2009 Global

with corporate governance, the financial reporting process, and audit

audit committees to effectively discharge their oversight functions in

internal and external auditors, accountants, governing bodies, users of

AUDIT COMMITTEE FORMATION, VOLUME I

ROLE, FOUNDATION, REGULATION, AND STRUCTURE

of audit committees to our financial markets and the determinants of

The Role of the Audit Committee

AUDIT COMMITTEE FORMATION, VOLUME I

The audit committee is empowered to protect investors from r eceiving

ROLE, FOUNDATION, REGULATION, AND STRUCTURE

1. Relevance Information is useful and provided in a

2. Evaluate processes for

Evaluate and review financials to become aware of weak

3. Conduct a peer group

Arrange periodic comparisons of quality performed among

4. Obtain industryspecific training

Obtain tailored industry-specific training to penetrate

Obtain legal and financial reporting assistance, which

that are important in evaluating the quality of information according to

AUDIT COMMITTEE FORMATION, VOLUME I

ROLE, FOUNDATION, REGULATION, AND STRUCTURE

Regulatory Requirements for Audit Committee

AUDIT COMMITTEE FORMATION, VOLUME I

2. SOX prohibits auditors from performing a variety of non-audit

ROLE, FOUNDATION, REGULATION, AND STRUCTURE

9. SOX ensures that corporate fraud, including financial statement

AUDIT COMMITTEE FORMATION, VOLUME I

Mandatory audit committees

audit committees. Underlying both SOX and the SEC-related regulations is

ROLE, FOUNDATION, REGULATION, AND STRUCTURE

SOX mandates the following requirements for audit committees:

AUDIT COMMITTEE FORMATION, VOLUME I

3. Disclosing any incentive-based arrangements that may encourage

ROLE, FOUNDATION, REGULATION, AND STRUCTURE

The 20072009 financial crisis

A wave of financial scandals

Rebuild public trust and

Rebuild investor confidence

240 rules to be established.

11 titles that describe specific

Say on pay, and say on golden

Guiding principles for

Private investor groups that

All investors, auditors, and

The majority of Related

Financial Services Oversight

Public Company Accounting

s uffice to improve public trust and investor confidence in public financial

AUDIT COMMITTEE FORMATION, VOLUME I

financial reporting and audit processes. Vigilant and effective audit

ROLE, FOUNDATION, REGULATION, AND STRUCTURE

understand global finance and handling anti-corruption compliance

Specific best practice

The audit committee

AUDIT COMMITTEE FORMATION, VOLUME I

ROLE, FOUNDATION, REGULATION, AND STRUCTURE

The audit committee must

The audit committee should retain

The audit committee must

The audit committee should be:

1. All members should have

1. All members of the audit