In the August 2018 article, “Are Audit Committees Worth the Cost?” (http://bit.ly/2pkOuCA), Arthur Radin suggests that audit committees be eliminated. Unfortunately, the article focuses entirely on only one function of audit committees: oversight of the external audit. In law, and in practice, those committees have much greater responsibilities.
Having served over a period of more than a dozen years as chairman of the audit committee for six large public companies, I’ve developed my own list of “Top Ten Audit Committee Responsibilities.” Only two of these deal directly with the external auditors: 1) appointing, compensating, and overseeing the work of the independent auditors; and 2) preapproving any nonaudit work by them. This 20% of my top ten roughly approximates the time I have spent on audit committees: 20% dealing with the external audit and 80% on everything else.
The remainder of my personal top ten are as follows:
- Reviewing with management the quarterly and annual financial reports—the most important duty of all
- Discussing draft earnings releases, as well as earnings guidance with management in advance of issuance
- Reviewing with the CEO and CFO how they are meeting their internal control certification requirements
- Overseeing the work of the internal auditor
- Establishing and monitoring procedures for employee reporting of complaints about accounting or control matters
- Overseeing legal and other compliance activities
- Overseeing policies and performance of risk management activities (when there is no separate risk committee)
- Preparing and regularly updating the committee charter and proxy statement reports.
My personal experience and numerous studies confirm that audit committees are the most active and involved of all corporate board committees. To suggest they be eliminated because meetings with external auditors take a certain amount of time seems like a very myopic position.
The Author Responds
Dennis R. Beresford makes a point that I have heard from others: the real usefulness of the audit committee is that it is a repository of board talent for risk evaluation, legal compliance, and other corporate purposes. Those activities are useful, and committees doing them should be commended, but they are not part of the “audit” function, which is to deal with the outside auditors. The issue that I wrote about is that, especially for smaller companies and not-for-profit organizations, the audit committee’s function is limited to the 20% Mr. Beresford refers to, as opposed to the 80% of “everything else.” The cost of that 20% appears to me to be far in excess of any benefit.