To Be or Not to Be…on the Audit Committee

As an ex-CPA and CFO, it’s my fate to land on the audit committee of many of the boards of directors of which I am a member. (At present, that totals six public companies.)

Let’s give this some perspective: For years the audit committee was considered a backwater of the board, a place where less-important directors served without pay or glory.

Things have surely changed!

Today’s audit committee members are responsible for everything except driving the CEO to work in the morning. According to Corporate Board Member magazine (full disclosure, I’m a founder and shareholder), audit committee members’ median pay is $134,388 and the chairman gets an additional $7,150. Unfortunately my compensation for audit duties falls a bit short of those numbers, but those are the facts nonetheless.

Furthermore, every corporate audit committee must now have a charter that sets forth its duties, and they are extensive. Here’s a sampling from one committee I sit on:

– monitor compliance with all applicable laws and regulations.
– retain outside auditors; review and evaluate their work.
– review and supervise internal audit operations.
– review officers’ expense accounts.
– consider conflicts of interest and related party transactions.
– review and validate whistle-blower complaints, and
– ten other duties relating to items such as taxes, board compensation, evaluation of fellow audit committee members’ performances, etc.

In addition, the audit committee must have a member who qualifies as a “financial expert”u00e2u20ac”usually defined as someone who has been a CPA or a CFO or has held positions that require financial judgment. My background easily makes me a financial expert as determined by the boards on which I serve, even though today’s accounting pronouncements are beyond my comprehension.

Two things impress me about the new-and-improved audit committee structure in the post-Sarbanes-Oxley corporate environment:

First, the responsibilities assigned to the audit committee are so extensive as to almost make them impossible to fulfill in the real world. Financial expert or not, I really have a difficult time knowing whether the auditors are genuinely doing a great job. As for full compliance with all laws and regulations, unfortunately, no one knows how well that has been accomplished until after a problem is discovered. I do my best and I spend a lot of time on audit committee responsibilities, but in the end, I mainly depend on the internal auditors for the information I need to make good decisions.

Second, the extensive and detailed obligations of the audit committee set up a near-perfect target for the plaintiffs’ bar and shareholder lawsuits. If the bar is set too high, then the chance of ever clearing it, as required, is very slim. In other words, it would not be hard for a plaintiff to find that at least some of the many obligations of the audit committee were not performedu00e2u20ac”or at least were not performed perfectly.

Liability for this failure can and will follow, and for the poor old “financial expert,” it will be twice as bad.

What to do? Be a devout coward and stay off audit committees? That may be the obvious answer. But that’s no fun and, besides, who wants to be a certified coward? On top of that, our companies need us.

For me, the answer is to do the best job on the audit committee that I can do, and then hope and pray that the system will provide reasonable latitude in judging performance. It usually does in the long run, but as so often has been pointed out, in the long run, we will have all departed the scene.