"Strengthening the Role of the Audit Committee"

"Strengthening the Role of the Audit Committee"
by Lawrence Richard Quinn

 The author addresses how “the best” audit committee chairs are responding to recent lapses in corporate governance by companies such as Enron, and how they are strengthening their roles.  The article summarizes interviews with five “most thoughtful heads of audit committees”, including Roderick M. Hills, former chairman of the SEC and Diane C. Harris, president of Hypotenuse Enterprises, Inc., a mergers and acquisitions advisory, consulting and outsourcing firm.

In the article, Diane Harris put forth four ideas for improving audit committee function in general:

1.)               Assess skills, talents and capabilities of committee members.  Harris was quoted:  “Given the ever-broadening scope of the auditing committee, you need to make sure that you have the necessary skills available to you – as does the whole board – whether you’re talking about derivatives, information technology, or accounting changes."

 2.)               Audit committees benefit from executives with broad backgrounds such as those in M&A or former CEOs.  M&A professionals have to have expertise in many subjects in order to be effective.  Of former CEO’s, Harris says “I wouldn’t be surprised to see them moving onto boards rather than off them” given the great need for their skills and time.

 3.)               Better preparation for meetings, and much more in-depth knowledge.  Harris is quoted:  “Until now, these committees have received advance materials from a company, then received a recap of that information, followed by some supplementary questions asked by committee members.  What I’m suggesting is that change will not necessarily be in the form of having more audit committee meetings or longer ones but meetings that are more in-depth and with more preparation required in advance.”  Regarding the preparatory information received, Harris says “You need to read that, digest it, then decide what is most appropriate.”

 4.)               Access is needed to management and to those in financial staff positions.  Harris is quoted as saying “You need a healthy climate between the audit committee and management – a consistent, open communication policy so that you’re in touch with people all the time, not just when there’s a problem.”

 In summary, and reflecting the input of the other interviewees as well, Harris says “There will be a lot of change in the way audit committees work.  It will happen slowly, but the trends are there.”