1. Audit Committees, Corporate Governance and Sarbanes-Oxley
Using History to Understand the Impact on Auditing – Both Internal and External
Ross Fuerman
Fall 2009

2. Public Company Corporate Governance in a Nutshell
Compensation Committee
Audit Committee
Nomination Committee
Board of Directors

3. Market Failure in the Auditing Services Market
Management
Financial Statement Users
CPA firms (external auditors)

4. "I do believe the market is a better place than the government in deciding how the market should be formed."
Joe Berardino (CEO of Andersen) stating his opposition to limits on the auditor providing nonaudit services to an audit client.

5. Why did Berardino say these things?
Why was he behaving this way?
Why did Boards of Directors, Compensation Committees, Nomination Committees and Audit Committees malfunction?
What did Sarbanes-Oxley, the SEC and the Exchanges do to mitigate these problems in general?
Independence measures

6. Specific Audit Committee Problems
Audit committees need to be comprised of people who are independent
Just like the Board of Directors and the other Committees
However, they also have to be comprised of people who know something about accounting and auditing

7. Famous Audit Committee Members
Before Sarbanes-Oxley and the other reforms…
Famous athletes (like football player OJ Simpson)
Famous politicians (like Vice President Dan Quayle)
Famous generals (like Stormin’ Norman Schwarzkopf, Commander of Desert Storm)

8. Audit Committee Attributes
All companies on any kind of US exchange must have an audit committee comprised entirely of independent directors
NYSE audit committee members must at least be "financially literate"; NASDAQ members must at least be able to read and understand fundamental financial statements
SEC says 1 member must be "financial expert"
Understand GAAP and financials
Understand GAAP re estimates, accruals & reserves
Be experienced in preparing, auditing or analysis
Understand internal controls re financial reporting
Understand audit committee functions

9. Audit Committee Functions
Directly responsible for the appointment, compensation and oversight of the external auditor
This includes pre-approval of nonaudit services, if any, performed by the CPA firm that is the external auditor (note that certain nonaudit services are now flat out prohibited)
This includes, for NYSE companies, considering whether to periodically rotate the entire CPA firm
Establishment of complaint (confidential, anonymous) procedures re accounting, internal control or auditing

10. The Internal Auditor Cynthia Cooper, Internal Auditor of WorldCom