Audit Committee

Formation in the
Aftermath of the
20072009 Global
Financial Crisis, Volume III

Audit Committee
Formation in the
Aftermath of the
20072009 Global
Financial Crisis, Volume III
Emerging Issues
Zabihollah Rezaee

Audit Committee Formation in the Aftermath of the 2007-2009 Global

Financial Crisis, Volume III: Emerging Issues
Copyright Business Expert Press, LLC, 2016
All rights reserved. No part of this publication may be reproduced, stored
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First published in 2016 by
Business Expert Press, LLC
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www.businessexpertpress.com
ISBN-13: 978-1-63157-533-4 (paperback)
ISBN-13: 978-1-63157-534-1 (e-book)
Business Expert Press Financial Accounting and Auditing Collection
Collection ISSN: 2151-2795 (print)
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Cover and interior design by S4Carlisle Publishing Services
Private Ltd., Chennai, India
First edition: 2016
10987654321
Printed in the United States of America

Abstract
The audit committee, as an integral component of corporate governance,
has gained considerable attention in the aftermath of 20072009 global
financial crisis. The audit committees role has evolved from a voluntary
liaison between management and external auditors to the standing committee of the board of directors in overseeing all aspects of corporate governance, financial reporting, internal controls, risk assessment, and audit
activities. This book addresses the determinants of audit committee oversight effectiveness, including their composition, independence, authority,
resources, diligence, and activities. Today, audit committees operate in an
environment of ever-increasing corporate governance reforms established
to protect investors and the public from receiving misleading financial
statements and related audit reports. Audit committees, in complying
with emerging corporate governance reforms, are striving to improve
their oversight effectiveness to discharge their oversight responsibilities.
This book is organized into three separate volumes, and each volume
can be utilized separately or in an integrated form. The first volume addresses the formation of the audit committee, its relevance, sources, structure and roles; the second volume focuses on the oversight functions of
the audit committee; and the third volume presents the emerging issues
of audit committees. The first volume consists of five chapters that examine the relevance and fundamentals of the audit committees as well as the
determinants of audit committee effectiveness. The second volume consists of nine chapters on financial, auditing, internal control, risk management, ethics and compliance, antifraud, and other oversight functions of
the audit committee. The third volume consists of several chapters on the
emerging issues of audit committees pertaining to evaluation, education,
reporting, and accountability as well as audit committees of private companies, governmental entities, and not-for-profit organizations.
The three volumes of this book present the essential and fundamental
aspects and functions of audit committees, with a keen focus on their
working relationship with other corporate governance participants including the board of directors, executives, internal auditors, external auditors, legal counsel, financial analysts, investment bankers, governing
bodies, standard setters, and other stakeholders. Anyone who is involved

vi ABSTRACT

with corporate governance, the financial reporting process, and audit

functions should be interested in this book. Specifically, corporations and
their executives, the boards of directors and audit committees, internal
and external auditors, accountants, governing bodies, users of financial
statements (investors, creditors, pensioners), business schools, and other
professionals (attorneys, financial analysts, bankers) will benefit from this
book. The three volumes of the book focus on up-to-date corporate governance measures and best practices in the aftermath of the global financial crisis and their impacts on audit committee effectiveness.

Keywords
Audit Committee, Corporate Governance, Oversight Effectiveness, Financial
Reports, Audit Functions, Risk Assessment, Internal Controls, Business
Ethics, Audit Committee Structure, Composition, Responsibilities and
Accountability

Contents
Acknowledgments....................................................................................ix
Introduction...........................................................................................xi
Chapter 1 Audit Committee Education, Evaluation,
Accountability, and Reporting............................................1
Chapter 2 Global Perspectives of Audit Committees.........................27
Chapter 3 Audit Committees of Private Companies,
Not-for-Profit Organizations, and Governmental
Entities.............................................................................41
Chapter 4 Audit Committees Interaction with Corporate
Gatekeepers and Those in Charge of Governance.............59
Chapter 5 Contemporary Issues of Audit Committees......................73
Index....................................................................................................95

Acknowledgments
I acknowledge the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the American Institute of C
ertified
Public Accountants, and Big Four Accounting Firms for permission to
quote and reference their professional standards and other publications.
The encouragement and support of my colleagues at the University
of Memphis are also acknowledged. Specifically, two of my graduate assistants, Mr. Rob Palmer and Mr. Josh McDonald provided invaluable
assistance. I thank the members of the Business Expert Press team and
S4Carlisle Publishing Services for their hard work and dedication in editing
the book, including Stewart Mattson, Scott Isenberg, Scott Showalter and
Jan Williams, Mark Bettner, Michael Coyne, and Premkumar Narayanan.
My sincere thanks are due to my family, my wife Soheila, and my
children Rose and Nick. Without their love, enthusiasm, and support,
this book would not have come to fruition when it did.
Zabihollah Rezaee
May 12, 2016

Introduction
The evolution of audit committees shows that the audit committee has
evolved from a debate over whether or not to voluntarily create audit
committees to the mandatory requirements for establishment of audit
committees, and now in the light of current corporate governance reforms, to how to effectively integrate the audit committee into corporate oversight functions as an important element of internal mechanisms
for corporate governance. Today, audit committees operate in an environment of ever-increasing corporate governance reforms established
to protect investors and the public from financial scandals. Audit committees, in complying with emerging corporate governance reforms, are
striving to improve their oversight effectiveness. To effectively fulfill their
new challenging oversight responsibilities in the aftermath of the global
20072009 financial crisis, audit committees are seeking guidance, and
best practices. This volume is intended to provide such guidance and best
practices regarding oversight functions of the audit committee in the
areas of corporate governance, financial reporting, internal controls, and
audit activities that are applicable to organizations of all types and sizes.
Recent regulatory reforms have shifted some of managements financial
reporting and audit involvement responsibilities to the audit committee. New regulatory reforms and best practices have conferred upon audit
committees certain duties that were previously the domain of management (e.g.,hiring and firing external auditors, overseeing internal audit
functions, setting audit fees).
This volume consists of five chapters addressing emerging issues in
audit committees including the global perspectives, education, evaluation, and accountability. This volume also examine audit committees of
private and not-for-profit organizations as well as audit committees interactions with other corporate gatekeepers and contemporary issues of
audit committees. Anyone who is involved with corporate governance,
the financial reporting process, and audit functions should be interested

xii INTRODUCTION

in this volume. Specifically, corporations and their executives, the boards

of directors and audit committees, internal and external auditors, accountants, governing bodies, policymakers, regulators, users of financial
statements (investors, creditors, pensioners), business schools, other professionals (attorneys, financial analysts, bankers) will benefit from this
volume.
CHAPTER 1:AUDIT COMMITTEE EDUCATION,
EVALUATION, ACCOUNTABILITY,
ANDREPORTING.
CHAPTER 2:GLOBAL PERSPECTIVES OF AUDIT
COMMITTEES
CHAPTER 3:AUDIT COMMITTEES OF PRIVATE
COMPANIES, NOT-FOR-PROFIT
ORGANIZATIONS, AND
GOVERNMENTAL ENTITIES
CHAPTER 4:AUDIT COMMITTEES INTERACTION
WITH CORPORATE GATEKEEPERS AND
THOSE IN CHARGE OF GOVERNANCE
CHAPTER 5:CONTEMPORARY ISSUES OF AUDIT
COMMITTEES

CHAPTER 1

Audit Committee Education,

Evaluation, Accountability,
and Reporting
Executive Summary
Corporate governance reforms in the past two decades, including the
SarbanesOxley Act of 2002 (SOX), the DoddFrank (DOF) Act of
2010, and the Securities and Exchange Commission (SEC)related
implementation rules and listing standards, underscore the importance
of the audit committee, evaluation accountability, and due diligence.
These reforms have emphasized the importance of the companys board
of directors and its board committees, including the audit committee, to
demonstrate a high level of due diligence, accountability, and professionalism. Audit committee accountability should reflect the audit committees commitment to proper education, training, due diligence, periodic
performance evaluation, and continuing professional education to assess
the audit committees effectiveness. This chapter presents educational and
training requirements as well as audit committee reports, performance
evaluations of individual audit committee members, and the assessment
of the effectiveness of the audit committee as a whole.

Introduction
The existence and persistence of financial statement fraud in high-profile
companies and their reported earnings restatements, along with the wave
of financial scandals at the turn of the 21st century and the 20072009
global financial crisis, have eroded public confidence in corporate

AUDIT COMMITTEE FORMATION, VOLUME III

governance including audit committee responsibilities and accountability. Regulatory reforms such as SOX endorse the principle that a properly
constituted, diligently functioning, and professionally accountable audit
committee can improve the effectiveness of corporate governance and reliability of financial reports and credibility of the audit function. The effectiveness of audit committees in fulfilling their nine oversight functions
depends on their due diligence and accountability. The audit committee
and its members should be periodically evaluated by the board of directors to ensure their effectiveness and accountability. The audit committee
can also conduct a periodic self-evaluation, preferably annually, to evaluate
its performance and oversight effectiveness. The remainder of this chapter
presents guiding principles for the audit committees accountability, training, continuing education, and evaluation.

Audit Committee Accountability

The SEC, in January 2000, adopted rules to improve audit committee
disclosures, primarily based on the recommendation of the Blue Ribbon
Committee (BRC).1 These rules require that: (1) proxy statements include certain disclosures from and about audit committees, including
their independence; (2) the audit committee report should state whether
the audit committee should recommend to the companys board of directors that the audited financial statements should be included in the annual reports Form 10-K or Form 10-KSB for the last fiscal year; and (3)
the companys proxy statement show whether its board of directors has
developed an audit committee charter and that it be included with the
proxy statements at least once every three years or in the interim if significant changes are made. Exhibit 1.1 summarizes GEs audit committee
charter with the specifics, purpose, membership, meetings, responsibilities, and duties of a typical audit committee of public companies.
To effectively discharge its accountability function, the audit committee must spend adequate time and pay attention to all nine oversight
functions. McCarthy and Duffy of KPMGs Audit Committee Institute2
argue that audit committees typically spend most of their attention on
financial reporting issues, but most members also prefer to spend significant agenda time on: (1) information technology (IT) risk and emerging

AUDIT COMMITTEE EDUCATION, EVALUATION

Exhibit 1.1
General Electric Company audit committee charter
1. To meet to review and discuss with management and the
independent auditor the annual audited financial statements
andquarterly financial statements.
2. To discuss with management and the independent auditor prior
to their release to the public, earnings press releases and financial
presentations provided to analysts and rating agencies.
3. To select the independent auditor to examine the Companys
accounts, controls, and financial statements. The committee
shall have the sole authority and responsibility to select, evaluate,
compensate, and oversee the work of any registered public
accounting firm engaged for the purpose of preparing or issuing
an audit report or performing other audit, review, or attest
services for the Company.
4. To discuss with management and the independent auditor, as
appropriate, any audit problems or difficulties and managements
response.
5. As required by NYSE listing requirements, to discuss
with management the Companys risk assessment and risk
management practices, guidelines, policies, and processes.
6. To oversee the risk policies and processes relating to financial
statements, financial systems, financial reporting processes,
compliance and auditing, and allowance for loan and lease losses,
as well as the guidelines, policies, and processes for monitoring
and mitigating such risks.
7. To oversee the Companys financial reporting activities, including
our annual report, and accounting standards and principles,
significant changes in such standards or principles or in their
application and the key accounting decisions affecting the
Companys financial statements.
8. To review and approve the internal corporate audit staff and
GECapital internal audit staff functions, including: (1) purpose,
(Continued )

AUDIT COMMITTEE FORMATION, VOLUME III

Exhibit 1.1 (Continued)

authority, and organizational reporting lines; (2) annual
audit plan, budget and staffing; and (3) concurrence in
the appointment, compensation, and rotation of the vice
presidentcorporate audit staff.
9. To review, with the chief financial officer, the vice president
corporate audit staff, the chief GE Capital audit executive, or
such others as the committee deems appropriate, the Companys
internal system of audit and financial controls and the results of
internal audits.
10. To obtain and review at least annually a formal written report
from the independent auditor delineating: the auditing
firms internal quality control procedures; the auditing firms
independence; and any material issues raised within the preceding
five years by the auditing firms internal quality control reviews, by
peer reviews of the firm, or by any governmental or other inquiry
or investigation relating to any audit conducted by the firm.
11. To prepare and publish an annual committee report in the
Companys proxy statement.
12. To set policies for hiring employees (current or former) of the
Companys independent auditor.
13. To review and investigate any matters pertaining to the integrity
of management or adherence to standards of business conduct as
required in the policies of the Company.
14. To establish and oversee procedures for the receipt, retention,
and treatment of complaints, as well as for confidential,
anonymous submissions by Company employees.
15. The committee shall meet separately at least quarterly with
management, the vice presidentcorporate audit staff, the GE
Capital CAO, and the Companys independent auditors.
16. To oversee the Companys cybersecurity program and cyber
strategyrelated risks. The committee shall review, at least
annually, the Companys cybersecurity program and shall receive
frequent updates on cyber and product security.

AUDIT COMMITTEE EDUCATION, EVALUATION

17. The committee shall have the authority to delegate any of its
responsibilities to subcommittees so long as at least one member
of the subcommittee shall be a financial expert.
18. The committee shall have authority to retain such outside
counsel, experts, and other advisors as the committee may deem
appropriate in its sole discretion.
19. The committee shall report its actions and any recommendations
to the board after each committee meeting and shall conduct an
annual performance evaluation of the committee. The committee
shall review at least annually the adequacy of this charter and
recommend any proposed changes to the board for approval.
Source: Adapted from General Electric 2016 Audit Committee Charter. Available at: www.
ge.com/sites/default/files/AC_charter.pdf

technologies; (2) risk management; (3) corporate strategy; and (4) the
impact of public policy initiatives. IT risk and emerging technologies are
issues very frequently cited by members as an area to which they want to
devote more agenda time. Very few committee members believe that their
companys strategic planning process is effective in dealing with the rapid
pace of technology changes and innovations. Because of the financial,
legal, reputational, and strategic issues posed by information technology,
IT risk and data governance are becoming big agenda items.
Second, risk management systems are typically described by c ommittee
members as needing significant work. Audit committees want to spend
more time on risk management because of concerns involving crisis readiness and response, supply chain issues, and systemic risk. Third, growth
plans, strategy, and innovation risks are also generating requests for more
agenda time at committee meetings. As companies search for growth
through various means (e.g., Mergers & Acquisitions, new services, etc.),
many committee members are concerned that the company has not effectively identified risks from its growth plans and properly implemented
controls to monitor those plans. Lastly, the impact of public policy initiatives on compliance, controls, risk, and reporting is another area on which
committee members prefer to spend significant agenda time. Business

AUDIT COMMITTEE FORMATION, VOLUME III

planning has become difficult and compliance has become challenging

because of many uncertainties related to the following: energy initiatives,
financial services regulation, health care and tax reform, and the impact
of fiscal crisis. Through all of this, a major challenge for companies will be
staying focused on the business and the pursuit of performance.
The 2011 report of the Audit Committee Institute suggests that to effectively discharge its accountability, the audit committee should engage
and perform the following 10 to-do items3:
Stay focused on the audit committees top priority: financial
reporting and related internal control risk.
Continue to monitor accounting judgments and estimates,
and prepare for accounting changes.
Consider whether the financial statements and disclosures tell
the companys story.
Focus on the companys plans to grow and innovate.
Reassess the companys vulnerability to business interruption,
as well as its crisis readiness.
Understand how technology changes and innovation are
transforming the business landscape and impacting the company.
Focus on asymmetric information risk and seek out dissenting
views.
Consider the impact of the regulatory environment on
compliance programs and business plans.
Understand the companys significant tax risks and how they
are being managed and modeled.
Monitor the initiatives of the Public Company Accounting
Oversight Board (PCAOB) on auditor independence and
transparency, and consider the implications for the audit
committee.

Education and Training of Audit Committees

Audit committee members have often been criticized for not devoting
adequate time to their oversight functions, instead relying too much on
management as well as internal and external auditors to provide them

AUDIT COMMITTEE EDUCATION, EVALUATION

with the necessary information to fulfill their duties, and not being
well-informed enough to understand the complexity and risk of financial
reports. Audit committee members should evaluate individually and collectively whether they have the education, time, expertise, knowledge, experience, and commitment to effectively fulfill their oversight functions.
Recent initiatives on corporate governance by national stock exchanges
(NYSE, NASDAQ) require continuing education and training for directors and audit committee members.
Lawmakers, regulators, investor activists, professional organizations, and corporate governance experts have recommended in varying degrees continuous professional education and formal evaluation
for audit committees to improve their oversight effectiveness. The
Deloitte& Touche 2004 survey reveals that more than 75 percent of
surveyed companies do not have a continuing education program for
their audit committee and less than 20 percent have formal evaluation
processes for their audit committees.4 The Conference Board recommends that: (1) public companies have an orientation program for each
member of their audit committees; and (2) all members of the audit
committee participate regularly in continuing education programs.5

Audit Committee Reports

There are typically three audit committee reports. First, the audit committee should provide regular reports or minutes of its meetings to the
companys board of directors describing the committees agenda, activities, deliberations, and recommendations. Second, in addition to this
regular report to the board of directors, the audit committee should
prepare and submit a formal annual report to the board of directors,
summarizing its authorities, duties, oversight responsibilities, resources,
funding, diligence process, performance, activities, recommendations,
and deliberations for the past year and its agenda for the coming year.
Third, the audit committee should prepare and submit a formal annual report to the companys shareholders stating that: (1) financial
standards prepared in accordance with generally accepted accounting
principles (GAAP) be included in the annual report on Form 10-K or
Form 10-KSB; (2) the audit committee has adopted a charter and has

AUDIT COMMITTEE FORMATION, VOLUME III

satisfied its oversight responsibilities in compliance with the established

charter as specified in the proxy statement. The BRCs report recommended that the SEC require an audit committee report to be included
in the annual proxy statements.6 The audit committee must indicate in
its report to shareholders whether the committee has7:
Reviewed and discussed the audited financial statements with
management;
Discussed with the independent auditor those matters
required to be communicated with the audit committee
in accordance with generally accepted auditing standards
(GAAS);
Received from the independent auditor the independent
disclosures and discussed with the independent auditor the
matters relevant to auditor independence;
Recommended to the companys board of directors, based on
discussions with management and the independent auditor, that
audited financial statements be included in the annual report on
Form 10-K or Form 10-KSB to be filed with the SEC.
The BRC initially recommended that the companys audit committee,
based on the reviews and discussions with management and the independent auditor, express its belief in the fair presentation of annual financial
statements in conformity to GAAP.8 However, the general understating is
that this type of expression of an opinion on audited financial statements
by the audit committee is far beyond its original oversight responsibilities
and may increase the liability of committee members.
The format and content of the audit committee report depends on
the size of the audit committee, its assumed oversight responsibilities, the
number of meetings during the year, and the number of designated audit
committee financial experts (a minimum of one). Exhibit 1.2 shows the
GE audit committee report. The audit committee should tailor its report
according to the oversight responsibilities assumed and its performance
during the year.
The 2014 GE Proxy Audit Committee Report consists of three paragraphs. The first paragraph describes the responsibilities of the companys management, the independent auditor, and the audit committee

AUDIT COMMITTEE EDUCATION, EVALUATION

Exhibit 1.2
General Electric Company
2014 Proxy Audit Committee Report
Roles and Responsibilities. The Audit Committee reviews GEs financial reporting process on behalf of the Board. Management has
the primary responsibility for establishing and maintaining adequate
internal financial controls, for preparing the financial statements and
for the public reporting process. KPMG, our companys independent
auditor for 2014, is responsible for expressing opinions on the conformity of the companys audited financial statements with GAAP and on
the companys internal control over financial reporting.
Required Disclosures and Discussions. The committee has reviewed
and discussed with management and KPMG the audited financial statements for the year ended December 31, 2014 and KPMGs evaluation of
the companys internal control over financial reporting. The committee
has also discussed with KPMG the matters that are required to be discussed under PCAOB standards. KPMG has provided to the committee
the written disclosures and the PCAOB-required letter regarding its communications with the Audit Committee concerning independence, and
the committee has discussed with KPMG that firms independence. The
committee has concluded that KPMGs provision of audit and non-audit
services to GE and its affiliates is compatible with KPMGs independence.
Committee Recommends including the Financial Statements in
the Annual Report. On the basis of the review and discussions referred to
above, the committee recommended to the Board that the audited financial
statements for the year ended December 31, 2014 be included in our annual
report on Form 10-K for 2014 for filing with the SEC. This report is provided by the following independent directors, who comprise the committee:
Douglas A. Warner III (Chairman)
Robert W. Lane
Robert J. Swieringa
Francisco DSouza
James J. Mulva
Source: Adapted from GEs Proxy Statement and 10-K Report filed with the SEC. Available
at: www.geproxy.com/audit/audit-committee-report

10

AUDIT COMMITTEE FORMATION, VOLUME III

pertaining to internal control over financial reporting and the preparation of financial statements. The second paragraph states that the audit
committee has met with both the companys management and the independent auditor to discuss the preparation of financial statements in
conformity with GAAP and other matters required to be discussed under
PCAOB standards. This paragraph also states that the companys independent auditor has provided to the audit committee the written disclosures,
the performed services (audit and non-audit), and has discussed auditor
independence with the external auditor. This paragraph also discusses auditor independence and describes provisions of non-audit services that are
compatible with maintaining auditor independence. The final concluding
paragraph states that, based on the audit committees discussion with the
companys management and the independent auditor, the audit committee recommended that the board of directors include audited financial
statements in its filings with the SEC on Form 10-K.

Audit Committee Evaluation

Continuing education and self-evaluation are becoming an integral part of
formal training and quality control for many professions (lawyers, accountants, physicians). Audit committees are no exception in this regard, and
should try to keep abreast of their profession through continuing education
and the self-evaluation process. National stock exchanges (NYSE, NASDAQ) require a formal evaluation process for the board of directors, and
each major committee of the board including the audit committee for their
listed public companies.9 The evaluation process for audit committees can
range from an informal self-evaluation basis to more of a formal basis coordinated by internal and external auditors and the governance committee
of the board of directors. Nevertheless, a proper evaluation approach can
vary from company to company depending on the corporate governance
structure, the board composition, the relationship between audit committees, and both management and internal and external auditors.
Audit committee members are being extensively scrutinized Post-Enron
and SOX era for their effectiveness in fulfilling their oversight responsibilities. Although SOX did not specifically require periodic evaluation of an
audit committees performance, the listing standards of National Stock

AUDIT COMMITTEE EDUCATION, EVALUATION

11

xchange (e.g., NYSE) require a formal evaluation process to be established

E
for listed companies board of directors and for each major committee of the
board including the audit committee.10 Several professional organizations
and public accounting firms provide the board and audit committee evaluation checklists and processes that can be used by companies in formally
evaluating the performance of their board, related committees, and individual directors or members of the their board committees. Examples are:
1. KPMG 2003. An Approach to Effective Audit Committee SelfEvaluation. Available at https://web.archive.org/web/20061104073518/;
www.kpmg.com/aci/docs/selfevaluation.pdf
2. National Association of Corporate Directors (NACD). 2004. R
eport
of the NACD Blue Ribbon Commission on Audit Committees:
www.nacdonline.org/
3. AuditNet web portal: Audit Committee Performance Self-evaluation
Survey: Available at https://web.archive.org/web/20100612224326/
http://auditnet.org/docs/IIANOVA/AC-Assess.pdf
4. American Institute of Certified Public Accountants (AICPA). 2015.
The AICPA Audit Committee Toolkit, Public Companies, 3rd edition. Audit Committee Charter Matrix. Available at: www.cpa2biz
.com/AST/Main/CPA2BIZ_Primary/ManagementAccounting/
Management/AuditCommittee/PRDOVR~PC-991001/PC-991001.jsp
These and other references can be used in evaluating the audit committees effectiveness in discharging its oversight responsibilities. The approach to the evaluation of the audit committee effectiveness should be
tailored to the companys attributes, its board of directors characteristics,
its corporate governance structure, and its reporting requirements, and
focus on the effectiveness of the audit committee rather than a checklist of
its compliance with applicable laws and regulations. The audit committee
evaluation process can be conducted by the companys board of directors,
self-evaluation by the audit committee, or externally by audit committee
consultants. Nevertheless, the purpose of the audit committee evaluation
is to identify areas of concern and noncompliance, and to make constructive suggestions for improvement in the effectiveness of audit committees
oversight responsibilities. The results of the audit committee evaluation

12

AUDIT COMMITTEE FORMATION, VOLUME III

Exhibit 1.3
Audit committee self-evaluation questionnaire
Audit Committee Self-Evaluation

Comments

1. Does the audit committee have a

charter and has the charter been
reviewed annually?

Yes

No

Not Sure

2. Are the audit committee members

educated appropriately and oriented
properly?

Yes

No

Not Sure

3. Are the members independent?

Yes

No

Not Sure

4. Does each member possess an

appropriate level of financial
acumen?

Yes

No

Not Sure

5. Do the members convey the

appropriate tone at the top?

Yes

No

Not Sure

6. Do audit committee members

participate in some form of
continuing professional education?

Yes

No

Not Sure

7. Are the audit committees meetings

properly scheduled, well organized,
efficient, effective, and of the
appropriate length?

Yes

No

Not Sure

8. Do the minutes and reports

to the full board reflect the
significant activities, actions, and
recommendations of the committee?

Yes

No

Not Sure

9. Does the audit committee have open

access to management, internal
audit, and external audit?

Yes

No

Not Sure

10. Are differences of opinion on issues

resolved to the satisfaction of the
entire audit committee?

Yes

No

Not Sure

11. Does the audit committee approve

all audit and permissible non-audit
services?

Yes

No

Not Sure

12. Does the audit committee review

the independent auditors reports to
ensure the auditors maintain their
independence?

Yes

No

Not Sure

AUDIT COMMITTEE EDUCATION, EVALUATION

13. Does the audit committee engage

in the hiring and evaluation of the
CAE?

Yes

No

Not Sure

14. Does the committee oversee internal

control over financial reporting?

Yes

No

Not Sure

15. Are the organizations overall

governance and internal controls,
including financial reporting
processes, stronger as a result of
managements interactions with the
audit committee?

Yes

No

Not Sure

13

Source: Adapted from American Institute of Certified Public Accountants (AICPA).

2015. The AICPA Audit Committee Toolkit, Public Companies, 3rd edition. Audit
Committee Charter Matrix. Available at: www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/
ManagementAccounting/Management/AuditCommittee/PRDOVR~PC-991001/PC-991001.jsp

should be properly documented and retained by the companys board of

directors or the audit committee. The most comprehensive audit committee evaluation form (checklist) is provided by Ernst & Young, one of the
Big Four public accounting firms, and is shown in Exhibit 1.3.
To be successful, the audit committee must understand its responsibilities and monitor its effectiveness while identifying improvement needs and
opportunities. Regular performance evaluations enable the committee to
meet the expectations of its members, the full board of directors, and regulatory bodies. An effective performance assessment process can consist of11:
Performing a self-assessment in a thoughtful manner rather
than regarding it as a compliance exercise.
Evaluating the performance of individual committee members
and then assessing the effectiveness of the whole committee.
Using the results from the self-assessment to help reengineer
processes and procedures.
These will lead to an effective performance assessment process that will
help the audit committee to: identify areas for continuing education; prioritize its agendas and meeting structure and focus on critical issues; and consider the level of detail and quality of information provided by management.

14

AUDIT COMMITTEE FORMATION, VOLUME III

Audit Committee Performance Evaluation Process

Corporate governance regulatory reforms (SOX and SEC-related implementation rules) do not directly address audit committee performance
evaluations. However, listing standards of national stock exchanges require that the audit committees of listed companies perform an annual performance assessment, including a self-assessment and one by
the full board of directors. The new listing standards of national stock
exchanges (NYSE and NASDAQ) that require an annual performance
evaluation of an audit committee do not provide any guidance regarding the format, content, or method of such an assessment.12 Since there
are no mandated guidelines or dictated approaches of audit committee
performance assessments, the board of directors and the audit committee have the flexibility to tailor this evaluation to the companys
corporate governance structure and attributes. Listed companies, in a
collaborative process including their board of directors, audit committee, and legal counsel, should decide: (1) who will perform the audit
committee performance assessment; (2) the format of the evaluation
process; (3) the documentation process; and (4) actions to be taken
based on the results.
1. Who should perform the audit committee performance assessment:
This issue should be addressed by the companys entire board of directors. This is the most logical choice, since the audit committee is
a standing committee and falls under the boards direct supervision.
However, self-evaluation is currently the norm and the most commonly
used process. Hiring an outside consultant to evaluate audit committee
performance is always an option if other methods are not considered
appropriate or feasible. The author suggests an evaluation committee
consisting of representatives from the board of directors, the audit committee, senior executives, the internal auditor, the independent auditor,
and legal counsel to conduct the formal annual evaluation.
2. The format of the evaluation process: This depends on who performs the evaluation. If the evaluation process is performed by the
audit committee, then an evaluation questionnaire distributed to
the members of the audit committee seems the most appropriate

AUDIT COMMITTEE EDUCATION, EVALUATION

15

method. If the board of directors or a designated committee conducts the evaluation, a combination of interviews and questionnaires
may be used. Despite the method of evaluation, the format should
cover knowledge, education, experience, teamwork, leadership ability, independence, financial literacy, overall performance, and fulfillment of the oversight functions of the audit committee.
3. The documentation process: The process of designing an evaluation tool (e.g., questionnaire), the format and content of the evaluation process, the information gathered and evaluated, the results
of the evaluation, recommendations made for improvements, and
possible actions taken by the board of directors must be adequately
documented. The documents can be used as a benchmark for future
evaluations, as a basis for the board of directors recommendations
and actions, and as legal evidence in the case of litigation. The documentation should be retained by the audit committee, the board
of directors, or legal counsel for at least as long as other important
financial and regulatory documentation.
4. Actions to be taken based on results: Despite the evaluation process
used and the parties involved in the evaluation, the companys board
of directors should receive the evaluation results and related documentation. The board of directors should take proper actions based
on these results and recommendations, including suggestions for improvements in the performance of the audit committee or the individual members of the audit committee and possible remedial actions.
Audit Committee Self-Evaluation
Corporate governance reforms including SOX, listing standards, and the
PCAOB all encourage and/or require audit committees to proactively engage in self-evaluation or conduct annual performance evaluations of the
entire audit committee, as well as each member of the audit committee.
Key benchmarks for an annual performance evaluation of audit committees are the companys corporate governance structure and practices,
ethical culture, financial reporting, internal controls, audit activities,
whistle-blower programs, relationships with other corporate governance
participants, and the audit committee charter.

16

AUDIT COMMITTEE FORMATION, VOLUME III

Exhibit 1.4 presents an audit committee self-evaluation survey tool

prepared by AuditNet.org and intended to measure how effectively the
audit committee is fulfilling its oversight responsibilities related to corporate governance, financial reporting, internal controls, and audit activities.13 This self-evaluation tool requires: (1) cooperation and f eedback
from senior executives (CEO, CFO, compliance officer), internal
and external auditors on opportunities to improve the effectiveness of
audit committee oversight functions; (2) discussion of the results of the
self-evaluation with the companys board, management, and auditors (internal and external) to identify areas for improvements; (3) evaluation of
performance of individual members of the audit committee by the audit
committee chairperson; and (4) recommendations for the future strength
and effectiveness of audit committee oversight functions.
The AICPA suggests that audit committees conduct a self-evaluation
on an annual basis and provide sample questions to evaluation of audit
committee effective oversight functions by assessing both the strengths
and weaknesses.14 The AICPAs evaluation tools are available online and
suggest the following areas of consideration15:
1. IntrospectionFocusing on the impacts that the audit committee
could have on overseeing financial reporting, internal controls, audit
activities, and corporate governance.
2. ComprehensivePerforming 360-degree evaluations of the audit
committee, all of its members including the audit committee chairperson. Audit committee members attendance record, the level of
participation, commitment, dedication, and effectiveness should be
evaluated. The audit committee chair with the consultation of the
companys board should decide whether any non-performing members should be rotated off the committee.
3. Performance ImprovementIn addition to self-evaluation of the audit
committee, feedback and inputs from executives (CEO, CFO, Compliance officer), internal and external auditors should be obtained on specific opportunities to improve audit committee oversight effectiveness.
4. CompetencyUsing AICPAs competency self-assessment tool
(CAT) available online to evaluate the performance of the audit
committee and its members.16

AUDIT COMMITTEE EDUCATION, EVALUATION

17

5. LeadershipThe leadership of the audit committee is very crucial to

its oversight effectiveness. The performance of the audit committee
chairperson should be evaluated. If members of the audit committee
collectively agree that the chairpersons performance is not satisfactory, they should bring their concerns to the audit committee chairperson as well as the chair of the corporate governance committee
and ultimately to the entire board of directors.
Pursuant to the passage of SOX and the issuance of the PCAOB
Auditing standard Nos. 2 and 5 and listing standards, many registered public accounting firms including the Big Four have prepared
questionnaires that can be used to assist in the self-evaluation of audit
committees performance. For example the audit committee evaluation questionnaire suggested by Deloitte & Touche, consisting of 66
questions related to audit committees composition and quality, understanding the business, process and procedures, communications and
information, oversight of the financial reporting process, internal controls, and audit functions.17 Deloitte & Touche suggests that in completing the audit committee assessment questionnaire, the company
should: (1) select a coordinator (the chairperson of the audit committee, corporate secretary, general counsel, chief audit executive [CAE])
and set a timeline for the evaluation process; (2) identify those persons
who interact with the audit committee and its members (CEO, CFO,
compliance officer, internal auditors, external auditors, legal counsel)
and who can provide feedback on improving the effectiveness of the
audit committee oversight functions; and (3) completed questionnaires
should be provided to the designated coordinator for consolidation into
a summarized assessment document to make suggestions for improvement of audit committee effectiveness.18
The Audit Committee Institute (ACI) of E&Y has published
Example audit committee self-assessment tool: Leading practice attributes of effective audit committees, which focuses on effectiveness
and not the compliance aspect of audit committees.19 Exhibit 1.3
presents a self-evaluation form as suggested by the AICPA in their book
The AICPA: Audit Committee Toolkit; Public Companies, 3rd edition.
Exhibit 1.4 presents an additional self-evaluation form by E&Y as listed

18

AUDIT COMMITTEE FORMATION, VOLUME III

on their website. To ensure audit committee oversight effectiveness, the

audit committee should perform continual self-evaluation by comparing its activities against standards, rules, regulations, recommendations,
and best practices intended for the audit committee (e.g., SOX, SEC
rules, listing standards, Conference Board). The self-evaluation can be
conducted annually by the chairperson of the committee assessing performance of the individual members of the committee and the entire audit
committee evaluating the performance of the chairperson.
Benchmarks or criteria often used in the audit committee
self-evaluation are: (1) knowledge, experience, and expertise; (2) maturity, objectivity, and independence; (3) leadership ability; (4) judgment;
(5) contribution to value-added services of the committee; (6) understanding of the companys business and industry; (7) firm commitment
to achieve audit committees mission, duties, and oversight responsibilities; (8) timely responses to audit committees inquiries; (9) attendance
of the meetings; and (10) devotion of time and efforts needed to prepare
for and participation in the audit committee activities and deliberations.
The self-evaluation of audit committee members should be discussed with
each member of the audit committee, and the self-assessment report be
prepared and reviewed with the companys board of directors, and recommendations are made for further consideration by the board. These
and other benchmarks for self-evaluation of audit committees and their
members are summarized in Exhibits 1.3 and 1.4.

Audit Committee Compensation

One component of the directors including the audit committee and executives compensation with significant growth in recent years has been in
stock-based compensation including stock options. Directors and executives compensation has often focused on the short-term performance with
no link to sustainable performance. Any cash compensation or short-term
stock-based compensation can fail to create proper incentives to align
manager interests with those of shareholder and thus to promote optimal risk taking by management. Nonetheless, stock-based compensation
could align managerial incentives with shareholder interests if it is linked
to sustainable performance and stock prices reflect managerial performance. Directors and executives compensation has increased substantially

AUDIT COMMITTEE EDUCATION, EVALUATION

19

Exhibit 1.4
Example audit committee self-assessment tool
Leading practice attributes of effective audit committees
Action
Plan
Audit Committee Agenda Questions

n/a

Oversight of the financial reporting process

questions

n/a

Committee chair performance questions

n/a

Continuing education questions

n/a

Risk management questions

n/a

Business knowledge questions

n/a

Business environment

n/a

Tone at the top

n/a

Business codes of conduct

n/a

Financial statements, disclosures, and other

reported information

n/a

Internal control over financial reporting

n/a

Antifraud policies and practices

n/a

Third-party risks

n/a

Compliance with applicable laws, rules,

regulations, and standards

n/a

Material alternative accounting treatments

n/a

Accounting policies and practices

n/a

Whistle-blowing policies and practices

n/a

Significant, complex, or unusual transactions

n/a

Regulatory filings
Mandatory disclosures

n/a

Voluntary disclosures
Management earnings forecasts

n/a

Managements discussion and analysis

(MD&A)

n/a

Interim financial reports

n/a

Integrated/sustainability Information

n/a

Others

n/a

Source: Adapted from Ernest & Young. 2014. Example audit committee self-assessment
tool. Leading practice attributes of effective audit committees. Available at: www.ey.com/
publication/vwluassets/ey_examples_audit_committee_self_assesment_tool/$file/ey-examplesaudit-committee-self-assesment-tool.pdf

20

AUDIT COMMITTEE FORMATION, VOLUME III

in recent years with significant growth in both cash and stock-based components. The DOF Act of 2011 addresses the transparency and structure
of public companies executive compensation, and thus the future of executive compensation is expected to focus on transparent, shareholder
approved, risk-adjusted and sustainability linked performance in terms of
cash and equity compensation. Section 304 of SOX empowers the SEC
to require top executives (CEO and CFO) of public companies to return
to the company any bonus or other incentive-based compensation including bonus and equity received within 12 months of restated financial
statements along with profits realized from the sale of stock during that
period.20
Audit committees often receive higher compensation than other board
committees in recognition of their increased responsibilities and time and
efforts commitment. In some cases, total compensation of audit committee members consists of: (1) fixed annual stipend; (2) payment for each
meeting attended; (3) stock-based compensation such as stock options;
(4) other benefits including medical and dental plans, insurance, and retirement plans; and (5) a deferred compensation plan. The determination
of the appropriate compensation for audit committee members has been
a challenge for many public companies in recent years, particularly in the
Post-Enron and SOX Act era. On one hand, companies benefit by paying
adequate compensation to attract the most qualified and independent
directors and to reward high-quality performance for the time and effort
commitment required and the increased liability assumed by members
of the audit committee. On the other hand, the compensation paid to
audit committee members should not be excessive so as to create disparities with compensation offered to members of other board committees
(nomination, compensation, governance) or to imply seeking loyalty to
management.
Recent corporate governance reforms have significantly increased the
extent and nature of audit committee oversight responsibilities as discussed in previous sections. The 10-minute infrequent meetings of the
audit committee with the companys independent auditors of the past
tended to besmirch audit committees reputation and effectiveness. These
reforms (SOX, SEC-related rules, listing standards) have significantly
changed the balance of power-sharing between management and the

AUDIT COMMITTEE EDUCATION, EVALUATION

21

audit committee. Thus, audit committees should be properly compensated for their increased responsibilities. In many public companies, the
board of directors compensation committee or finance committee determines the amount of compensation for members of the audit committee,
and the committee chair person normally receives more remuneration
than other members.
According to a survey conducted in 2012 by the Hay Group, annual compensation of a typical non-employee director includes an annual retainer for board service, meeting fees for board and committee
service, and an annual retainer for chairing a committee or serving as
a member of a committee.21 The median annual retainer is $85,000.
Of the companies surveyed, 31 percent paid meeting fees for attending
board meetings, and 35 percent paid meeting fees for attending audit
committee meetings. The median meeting fee for board and committee
meetings is $2,000. The audit committee chairperson earns a median
retainer of $20,000, while an audit committee member earns a median
retainer of $10,000. In addition to these common forms of compensation, directors can also receive long-term incentives in the form of
stock options or restricted stock. The median value of these incentives
is $125,000.22
Using this data, the Hay Group determined total direct compensation of directors by using three different assumptions. First, the director is a chairperson of the audit committee and a member of the
nominating committee, earning a median compensation of $241,625.
Second, the director is a chairperson of the compensation committee
and a member of the nominating committee, earning a median compensation of $237,725. Lastly, the director is a member of the audit
committee and a member of the compensation committee, earning a
median compensation of $227,250. As accountabilities on directors
continue to grow, it is expected to see pay levels continue to increase.23

Independent Auditor Evaluation

oftheAuditCommittee
The PCAOB in its Auditing Standards No. 2 entitled An Audit of Internal Control over Financial Reporting Performed in Conjunction with

22

AUDIT COMMITTEE FORMATION, VOLUME III

an Audit of Financial Statements requires that the independent auditor

consider audit committee effectiveness as part of its audit of internal control over financial reporting.24 The PCAOB in its Auditing Standards
No.2, was superseded by Auditing Standard No. 525 and while recognizing that companys board of directors is primarily responsible for evaluating the effectiveness of the audit committee, requires the independent
auditor to consider the following factors in evaluating the effectiveness of
the audit committee26:
1. Independence of audit committee members from management.
2. Formal written charter for the audit committee clearly describing
the committees oversight responsibilities, and how well audit committee members and management understand those responsibilities.
3. The audit committees working relationships including interactions,
involvements, and cooperation with both independent auditors and
the internal auditors.
4. The audit committees working relationships including interacting
and involvements with key members of financial management such
as the chief financial officer and the chief accounting officer.
5. Whether the audit committee is responsive to auditing and internal
control matters raised by the independent auditor.
6. Whether the audit committee addresses appropriate issues with
management and the independent auditor regarding the critical accounting practices and policies, accounting estimates, reserves, and
accruals that requires judgment.
According to the PCAOB Auditing Standard No. 2, ineffective audit
committees should be viewed as at least a significant deficiency or as a
strong indicator of a material weakness in internal control over financial
reporting that should be included in both the management report and
auditor opinion on internal control over financial reporting.27

Conclusion
Corporate governance regulatory reforms including the SOX , the DOF
Act of 2010, the SEC-related implementation rules, and listing standards

AUDIT COMMITTEE EDUCATION, EVALUATION

23

of national stock exchanges address audit committees accountability,

training, education, evaluation, and compensation. The responsibilities
assigned to audit committees and how they should be evaluated and held
accountable are typically set forth in their charter as approved by the entire board of directors. Audit committee charters should specify processes,
procedures for proper training, education, performance evaluation, and
accountability of the audit committee. Furthermore, the new SEC rules
require public companies to provide adequate disclosures about: (1) the
relationship of a companys compensation policies and practices to risk
management; (2) revised reporting of stock and option awards to company executives and directors in the Summary Compensation Table; and
(3) potential conflicts of interests of compensation consultants.

Action Items
1. Design an annual evaluation process based on audit committee
charter.
2. Provide orientation for new members of the audit committee.
3. Require annual continuing education for all members of the audit
committee.
4. Conduct annual evaluation of the entire audit committee and all
members of the audit committee.
5. Ensure audit committee members are compensated properly for
their oversight function performance.

Endnotes
1. Securities and Exchange Commission (SEC). 2000. Final Rule.
Audit Committee Disclosure. Available at: www.sec.gov/rules/
final/34-42266.htm
2. McCarth, M. P & Duffy, T. 2011. Where Does the Audit C
ommittee
Want to Spend More Agenda Time? October /November 2011.
Available at: www.directorship.com
3. Audit Committee Institute. 2011. Ten to Dos for Audit Committee
in 2012 (December 2011). Available at: www.auditcommittee
institute.com.

24

AUDIT COMMITTEE FORMATION, VOLUME III

4. Deloitte & Touche. 2004. Continuing Education for Boards and

Audit Committees: New Challenges, New Opportunities. Available
at: https://web.archive.org/web/20061011175854/;www.deloitte
.com/dtt/cda/doc/content/us_assur_continuinged%281%29.pdf
5. The Conference Board. 2003. Commission on Public Trust and Private Enterprise; Part 3: Auditing and Accounting. (January). Available
at: www.conference-board.org/pdf_free/SR-03-04.pdf
6. Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (BRC). 1999. Report and recommendations
of Blue Ribbon Committee on improving the effectiveness of corporate
audit committees. New York, NY and Washington, DC: NYSE and
NASD.
7. Ibid.
8. Ibid.
9. New York Stock Exchange (NYSE). 2004. Final NYSE Corporate
Governance Rules. Available at: www.ecgi.org/codes/documents/finalcorpgovrules.pdf.
10. Ibid.
11. Ernst & Young. 2012. Audit Committee: Leading Practices and
Trends. Audit Committee, February 2012. Available at: www.ey.com
12. NYSE. 2004.
13. AuditNet Web Portal. 2004. Audit committee Performance SelfEvaluation Survey. Available at: https://web.archive.org/web/
20100612224326/http://auditnet.org/docs/IIANOVA/AC-Assess.pdf
14. American Institute of Certified Public Accountants (AICPA). 2004.
Conducting an Audit committee Self-Evaluation: Guidelines and Questions. Available at: https://web.archive.org/web/20050204145217/;
www.aicpa.org/audcommctr/toolkits/17.htm
15. Ibid.
16. AICPA. 2004. Competency Self-Assessment Tool (CAT). Available
at: https://www.cpa2biz.com/CPE/CAT.htm
17. Deloitte & Touche. Audit Committee Performance Evaluation.
Available at: https://web.archive.org/web/20081109201832/;www.
deloitte.com/dtt/cda/doc/content/us_assur_AuditCommitteePerfor
manceEvaluation.pdf
18. Ibid.

AUDIT COMMITTEE EDUCATION, EVALUATION

25

19. KPMG.2003.AnApproachtoEffectiveAuditCommitteeSelf-Evaluation.
Available at: https://web.archive.org/web/20061104073518/;www.
kpmg.com/aci/docs/selfevaluation.pdf. ACIs publication on Basic
Principles for Audit Committee (Basic Principles). Available at:
https://web.archive.org/web/20061114172429/;www.kpmg
.com/aci/docs/basicprinciples.pdf
20. DoddFrank Act of 2010.
21. Hay Group. 2012. Non-Executive Director Compensation and
Benefits Survey.
22. Ibid.
23. Ibid.
24. PCAOB. 2004. AUDITING STANDARD No. 2 An Audit of Internal Control Over Financial Reporting Performed in Conjunction
with an Audit of Financial Statements. Available at: http://pcaobus.
org/Standards/Auditing/Pages/Auditing_Standard_2.aspx
25. PCAOB. 2007. AUDITING STANDARD No. 5 An Audit of Internal Control Over Financial Reporting Performed in Conjunction
with an Audit of Financial Statements. Available at:
26. http://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_5
.aspx
27. Ibid PCAOB Auditing Standards Nos. 2 and 5.
28. Ibid.

Index
Accountability reporting, 56
Advisory role, of audit committee, 80
American Institute of Certified Public
Accountants (AICPA), 11, 56
self-evaluation tools, 1617
Antifraud programs
and practice, 8183
and policy, 45
Atlantic Acceptance Corporation
Limited (1965), 29
Audit committee
accountability, 26
in American University, 50
annual report of, 43
audit legislation, 69
board committees and directors,
interactions with, 6163
business sustainability, role in,
7678
challenges for, 8091
compensation, 18, 2021
contemporary issues of, 7391
convergence in, 2728, 3536
corporate gatekeepers, 6065
education and training of, 67
ethical consideration, 6971
evaluation of, 1018
independent auditor, 2122
General Electric company
charter, 35
proxy report, 810
global perspectives of, 2736
of governmental organizations,
4243
independent auditors, interactions
with, 6364
independent counsel and advisers,
interactions with, 6465
international listing standards,
3031
investor confidence, in global
financial markets, 7476

in New Castle County, Delaware, 49

for NFP organizations, 4554
governance structure of, 5457
in Ohio, 51
oversight effectiveness, 18
performance evaluation process,
1415
of private companies, 4345
report, 6669
Ford motor company, 6768
reports of, 710
risk management, 5
in San Diego, 48
self-evaluation, 12, 1518, 19
voluntary disclosures, 91
worldwide, 2835
XBRL reports, role in, 7879
Audit Committee Excellence Series
(ACES), 65
Audit Committee Institute (ACI), 6, 17
Audit Committee Institute of KPMG
(2002), 45
Audit engagement, 63
Auditing standard No. 2, 17,
2122, 82
Auditing standard No. 5, 17, 82, 89
Audit legislation, 69
Auditor independence, 10
Audit quality, 4445
Australian Stock Exchange (ASX), 33
Australia, worldwide audit
committee, 33
Blue Ribbon Committee (BRC), 2, 8
Bribery Act, 36
Business sustainability, audit
committee role in, 7678
economic performance, 76
environmental performance, 78
ethical performance, 7778
governance performance, 7677
social performance, 77

96 INDEX

Cadbury report, 3233

Canada, worldwide audit committee,
2932
Canadian Institute of Chartered
Accountants (CICA), 29
Center for Public Trust (CPT), 70
core commitments, guiding
documents, 71
ethics aspirations, guiding
documents, 71
Chief risk officer (CRO), 88
Codes of conduct, 45
Compensation advisors, 62
Compensation committee, 60, 62
Competency self-assessment tool
(CAT), 16
Compliance system, 36
Consultative Committee of Accounting
Bodies (CCAB), 32
Convergence, in audit committee,
3536
Corporate gatekeepers, 6065
Corporate governance, 7, 2729, 34,
35, 44, 7677, 80
ASX, recommendations by, 33
concentrated ownership system of, 29
dispersed ownership system of, 29
financial aspects of, 3233
global convergence in, 36
reforms, 14, 15, 20
U.K. approach to, 28
Corporate social responsibility
(CSR), 77
Corporations Act 2001, 33
COSO, 88
Documentation process, 15
DoddFrank (DOF) Act, 1, 20, 43,
61, 77
Economic, governance, social, ethical,
and environmental (EGSEE),
7678
Economic sustainability
performance, 76
Employee fraud, 83
Enterprise risk management (ERM),
46, 8889

Ethical corporate culture, 78

European Association for Listed
Companies (EALIC), 85
European Union (EU), 69
Extensible Business Reporting
Language (XBRL), 78
e-filing system using, 90
financial reports using, 90
financial statements, 8990
Extensible Markup Language (XML),
7879
External risks, in organization, 8384
Financial Accounting Standards Board
(FASB), 79, 61, 85, 8687
Financial information, 74
Financial reporting process, 44, 90
Financial restatements, 81
Financial standards, 7
Foreign Corrupt Practices Act, 36
General Electric company
charter, 35
proxy report, 810
Generally accepted accounting
principles (GAAP), 7, 10
Generally accepted auditing standards
(GAAS), 8
Germany, worldwide audit committee
in, 3435
Global capital markets, 28
Global ethics, 36
Global financial reporting standards,
8487
Global investors, 28
Governance performance, of
sustainability, 7677
Government Finance Officer
Association (GFOA), audit
committees recommendations
for, 4243
Hay Group, annual compensation
of, 21
Hybrid approach, of financial
reports, 87
IFRS Taxonomy, 79, 85

 INDEX
97

Independent auditor, 8, 10, 22,

6364, 70, 82
Independent directors, 29, 62
Information technology (IT) risk, 5
Inspection report, on Deloitte, 70
Integrated audit approach, 8990
Internal audit, 61, 69
function, 82
Internal control, 44, 82, 88
reports, 90
of NFP organizations, 5556
Internal control over financial
reporting (ICFR), 2122,
63, 81
Internal risks, in organization, 83
International Accounting Standards
Board (IASB), 85
and FASB, collaboration
between, 86
International Auditing and Assurance
Standards Board (IAASB), 75
International Federation of
Accountants (IFAC), 74
International Financial Reporting
Standards (IFRS), 75, 87, 86
International Organization of
Securities Commissions
(IOSCO), 75
International Standards on Auditing
(ISAs), 75
Investor confidence, in global
financial markets, 7476
Japan, worldwide audit committee in,
3334
KPMG, 11
for global audit committees, 3536

National Association of States Board

of Accountancy (NASBA), 70
National Stock Exchanges, 1011, 14
in United States, 60
New York Stock Exchange
(NYSE), 66
Nominating committee, 60, 62
Not-for-profit (NFP) organizations,
4142, 4554
audit committee guidelines for,
5254
charters, 4850, 54
governance structure of, 5457
Ontario Business Corporation
Act, 31
Principles-based approach, 85
Proxy statements, 2
Public Company Accounting
Oversight Board (PCAOB),
10, 15, 64, 61, 83, 89
Auditing Standard (AS) No. 5,
82, 89
in Auditing Standards No. 2,
2122, 82
inspection report, 70
Public policy initiatives, 5
PwC, 84, 90
antifraud program
recommendations, 82
ERM suggestions, 8889
fraud deterrence suggestions, 83
Royal Commission, 29

Management board system, 3435

Management fraud, 83
Ministry of Justice (MOJ), of
Japan, 34

SarbanesOxley Act of 2002 (SOX),

1, 15, 28, 43, 61, 63, 64, 77
section 304 of, 20
section 404 of, 44, 5556
Securities and Exchange Commission
(SEC), 2, 36, 8, 61, 63, 79,
82, 8687
Single-tier board structure, 29
Supervisory board system, 3435

National Association of Corporate

Directors (NACD), 11

Task force, in financial reports, 74

investor confidence, restoring, 75

Lawrence Committee (1967), 29

98 INDEX

Toronto Stock Exchange

requirements of, 34
standards of, 3132
Two-tier board structure, 29
United Kingdom, worldwide audit
committee in, 3233
United States
worldwide audit committee, 2829

SarbanesOxley Act of 2002 (SOX)

in, 28
National Stock Exchanges in, 60
accounting standards, 85
GAAP Financial Reporting
Taxonomy, 79, 85
Watson Committee (1968), 29, 31
Whistle-blower programs, 45, 55,
82, 36

OTHER TITLES IN OUR FINANCIAL ACCOUNTING

AND AUDITING COLLECTION
Mark S. Bettner, Bucknell University and
Michael P. Coyne, Fairfield University, Editors
Executive Compensation: Accounting and Economic Issues by Gary Giroux
Using Accounting and Financial Information: Analyzing, Forecasting, and
Decision-Making by Mark Bettner
Pick a Number: Internationalizing U.S. Accounting by Roger Hussey and Audra Ong
International Auditing Standards in the United States: Comparing and Understanding
Standards for ISA and PCAOB by Asokan Anandarajan and Gary Kleinman
Accounting for People Who Think They Hate Accounting by Anurag Singal
Accounting for Fun and Profit: A Guide to Understanding Financial Statements
byLawrence Weiss
Audit Committee Formation in the Aftermath of the 20072009 Global Financial Crisis,
Volume I: Structure and Roles by Zabihollah Rezaee
Audit Committee Formation in the Aftermath of the 20072009 Global Financial Crisis,
Volume II: Responsibilities and Sustainability by Zabihollah Rezaee

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