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Research shows the right expertise improves their quality. Audit committees of corporate boards of directors have come under increased scrutiny in the wake of numerous financial reporting improprieties and breakdowns in corporate governance. In a much-quoted September 1998 speech, SEC Chairman Levitt chided audit committees for not being vigilant in their oversight function and called for strengthening of the audit committee (see Arthur Levitt Addresses Illusions, JofA, Dec. 98, page 12). On the heels of Levitt's address, the New York Stock Exchange and the National Association of Securities Dealers created the Ribbon Committee (BRC) on Improving the Effectiveness of Corporate Audit Committees, which moved quickly to issue recommendations geared to enhancing audit committee independence and director qualifications (see Blue Ribbon Panel Issues Its 10 Commandments, JofA, Apr. 99, page 4). The blue ribbon committee urged the major U.S. securities exchanges and the SEC to require audit committees to be composed only of independent directors, with at least one committee member having accounting or related financial management expertise. Shortly after the blue ribbon committee issued its recommendations, the authors conducted a survey of audit committees that provided insight into whether their effectiveness would improve if they were to adopt the BRC's recommendations on independence and director qualifications. The findings should engage audit committees, auditors, regulators, standard-setters, corporate management and others with an interest in the role of audit committees in the financial reporting process and the likely impact of new rules on the committees. Some observers expect the BRC's rules on independence and director qualifications will result in audit committees that are objective and competent in fulfilling their corporate governance responsibilities. Limited insight exists, however, into the effect these rules will have on the regularity of audit committee meetings and on the adoption of recommended committee activities. Among the questions are, for example, will independent audit committees that have at least one member who is qualified in accounting or financial management meet frequently and for longer time periods than committees without such members? Will independent audit committees with expertise in accounting or finance be proactive in reviewing internal controls? SEARCHING FOR ANSWERS The chief internal auditors of 123 large, public manufacturing companies responded to our survey which covered the composition of their audit committees, the directors' qualifications and the committees' reviews of certain internal audit proposals and results. We chose to pinpoint the chief internal auditors because of their availability, their role in corporate governance, their relationship with audit committees and their knowledge of audit committee reform issues. We selected publicly held companies because listing requirements at the major U.S. stock exchanges address audit committee composition. Relatively large, established companies also are likely to have strong audit committees and experience less difficulty in recruiting qualified directors. The chief internal auditors reported how many of their company's audit committee members matched the BRC's description of an independent director--that is, an outside director having no affiliation with management besides being a member of the audit committee. The panel had noted in its report that several recent studies had found a correlation between audit committee independence and a higher degree of active oversight. The report said that independent directors are more likely to be able to evaluate objectively the propriety of management's accounting, internal control and reporting practices. Independence long has been regarded as crucial to ensuring audit committees fulfill objectively and effectively their oversight role. …
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