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CPAs as Audit Committee members: be part of the new vanguard in corporate governance.


* WITH THE ADVERT OF SARBANES-OXLEY, CPAs ARE LIKELY to receive more invitations to serve on the audit committees of corporate boards of directors. Before accepting these offers, accountants should make sure they are ready for the time commitment and other responsibilities that come along with them.

* MANY CPAs WILL BE ASKED TO SERVE AS THE AUDIT committee's financial expert. This individual should have an understanding of GAAP and financial statements, experience preparing, auditing, analyzing or evaluating statements that show a level of complexity similar to the company's and an understanding of internal controls, financial reporting procedures and audit committee functions.

* INDUSTRY EXPERTISE IS AN IMPORTANT QUALIFICATION for audit committee service. For certain specialized industries CPAs may need to devote extra time to gain a working understanding of the business and its competitors.

* SERVING ON AN AUDIT COMMITTEE INVOLVES a significant time commitment, including preparing for meetings as well as attending them. Preparation time depends on the responsibilities in the audit committee's charter and the resources available to help it do its job.

* BEFORE MAKING A FINAL DECISION TO JOIN an audit committee, CPAs should be sure to read the sections of Sarbanes-Oxley pertaining to audit committees as well as the company's audit committee charter, speak to current and former committee members and evaluate their own independence from the company and its management.

Corporate America is only beginning to feel the impact of the Sarbanes-Oxley Act of 2002. Not surprisingly, one consequence of this legislation is that CPAs, particularly those who are retired from public practice or those in industry, are often sought after to serve on boards of directors of both public and private companies. It is particularly critical for the long-term economic confidence of the nation that American businesses attract and retain talented individuals to serve on their boards' audit committees. Now that the SEC has issued its definition of "audit committee financial expert," even more companies are seeking CPAs as board members.

Serving on an audit committee can be professionally rewarding. For many accountants, it provides an opportunity to contribute a lifetime of experience in a challenging new business environment. Many CPAs find the intellectual interaction with other corporate leaders to be a pleasant addition to their careers. This experience, however, is not universal. For some, the benefits do not justify the personal commitment, media spotlight and legal liability that potentially accompany audit committee service. A few have resigned their positions while others simply do not accept offers to serve. This article outlines some key factors and practical issues CPAs contemplating service on an audit committee should consider before joining. In addition, "Six Points to Ponder When Invited to Join an Audit Committee" on page 36 offers guidance from CPAs who serve on corporate boards and their insights into the decision of whether to join a board and its audit committee.


SEC rules implementing section 407 of Sarbanes-Oxley require a company to disclose whether it has at least one "financial expert" serving on its audit committee and, if so, the expert's name and whether he or she is independent of management. A company that does not have such an expert on its audit committee must disclose this fact and explain why.

It makes sense that corporate America would look to CPAs to satisfy this new requirement because the SEC defines a financial expert as someone with

* An understanding of GAAP and financial statements.

* The ability to assess the general application of these principles in connection with accounting for estimates, accruals and reserves.

* Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable with the breadth and complexity of issues the company's financial statements might reasonably raise or experience actively supervising one or more persons engaged in such activities.

* An understanding of internal controls and financial reporting procedures.

* An understanding of audit committee functions.

Under SEC rules, a person must have acquired these attributes by any one or more of the following means:

* Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor.

* Experience actively supervising one of the above or someone performing similar functions.

* Experience overseeing or assessing the performance of companies or public accountants regarding the preparation, auditing or evaluation of financial statements.

* Other relevant experience. CPAs in both public practice and industry typically have these attributes and qualify as audit committee financial experts. However, CPAs need to consider a number of other issues and factors when contemplating an offer to serve on an audit committee.


By design, board members frequently are drawn from a wide spectrum of industries and professions. This diversity adds valuable perspective when assessing corporate strategy, overseeing management and evaluating operating performance. New members without the requisite industry background must devote extra time and effort to gain a working understanding of that business. Certain industries, however, have higher degrees of specialization, uniqueness or regulation than others, and the "learning curve" could be considerably longer.

For more specialized industries, audit committee members in particular often need to devote extra time to understanding the financial implications of a company's circumstances. Take, for example, the insurance industry. All insurance company audit committee members need to understand issues such as

* Statutory accounting. Prescribed by the National Association of Insurance Commissioners, this method of accounting differs significantly from GAAP.

* State regulation. These rules are unique to each of the 50 states. Most insurance companies typically do business in multiple states.

* Actuarial considerations. The methods and assumptions actuaries use for pricing and reserve valuation criteria.


For many CPAs, the amount of time required to effectively serve is the primary consideration in deciding whether to accept an audit committee assignment. Three major factors--the committee charter, meeting preparation and available resources--influence the time commitment.

Audit committee charter. This document sets out the group's responsibilities, authority and specific duties. Typically, an audit committee oversees and monitors a company's financial accounting and reporting process, its internal controls system and the external audit process.

It's quite possible members may have other responsibilities as well. The biggest variable in establishing the extent of audit committee oversight is whether other board committees exist to handle related financial matters. For example many boards of directors have a finance committee, which exercises general oversight over the company's financial programs. Certain financial services institutions also may have a committee to supervise investment policies and procedures. The absence of such committees may add to the audit committee's workload and increase the time commitment of its members.

Preparation. An audit committee typically meets between four and eight times a year. The actual time attending these meetings usually is dwarfed by the time a member must spend to prepare for them. A common boardroom debate revolves around the volume and level of detail of information and materials management provides to committee members prior to meetings. Not long ago a six-member audit committee at one large company debated the issue, with three members wanting to reduce the level of detail from management and the other three asking for more. While this might seem unusual, it highlights the fact that a review of financial statements, independent accountant communications, internal audit reports, management reports and correspondence all take place before the meeting and require considerable preparation time. Conscientious members arrive at audit committee meetings prepared to address key issues and to ask the right questions.

Resources. Section 301 of Sarbanes-Oxley specifically addresses the issue of audit committee resources. It says, "Each audit committee shall have the authority to engage independent counsel or other advisors, as it determines necessary to carry out its duties." That section also says, "Each issuer shall provide appropriate funding to the audit committee."

Not every audit committee has the time, skills and experience to handle every problem that comes its way, particularly if the company faces unusual, difficult or contentious issues. Increasingly, proactive audit committees are augmenting their collective member expertise by:

* Obtaining training and education on current issues affecting the company.

* Engaging their own industry and financial experts.

* Hiring legal counsel for the committee.

As committees strive to assess risk, determine the adequacy of controls and understand key business drivers, they often seek outside advice to ensure they are asking the right questions. Not only does this provide important incremental expertise, it also eases the burden on individual committee members who might otherwise have to devote extra time and effort on their own.


Many CPAs will be asked to serve as the audit committee financial expert. By virtue of their financial skills, acumen, training and background, CPAs are in an excellent position to grasp key issues quickly and make leadership contributions to audit committees. This also could include serving as committee chair. In this role, CPAs would have additional responsibilities, the most significant being setting the group's agenda.

Establishing the committee agenda requires considerable judgment. After consulting with senior management, other audit committee members, board members, the internal audit director, the independent audit partner and others, the chairperson must cull through myriad events, business situations, reports, projects and governance issues that potentially could be brought before the committee, weed out those that waste valuable committee time, home in on high-risk areas and rank topics worthy of committee consideration. CPAs contemplating audit committee membership should keep in mind that serving in a leadership role, including as chairperson of the committee, would not be unusual.


Audit committee members have a fiduciary duty to the company and to its shareholders. Accordingly, legal liability is a major concern for CPAs considering joining a board of directors. While directors can ease those concerns somewhat by securing adequate directors & officers insurance coverage as well as by retaining legal counsel and other experts to advise them, the liability is a reality prospective directors must weigh before accepting an invitation to join a board and its audit committee. When researching the company, CPAs not only have to review the entity's financial statements and products but also investigate its corporate reputation, management practices and business ethics.

In its final rule on audit committee disclosure, the SEC noted that in adopting the new rules and amendments, "we do not intend to subject companies or their directors to increased exposure to liability under the federal securities laws, or to create new standards for directors to fulfill their duties under state corporation law" The SEC went on to say that it did not believe the disclosure requirements would result in increased liability exposure or create new standards. It remains to be seen whether one of the long-term consequences of Sarbanes-Oxley is to increase or decrease litigation. Nevertheless, from the viewpoint of an individual director, legal liability is--and will remain--a major boardroom concern.


Before deciding whether to accept an offer to join an audit committee, CPAs should take these steps:

* Learn the law. Understand the required roles, responsibilities and duties. Read the sections of Sarbanes-Oxley that pertain to audit committees. The AICPA Web site,, is an excellent resource.

* Research the industry. Get to know the industry in which the company operates. (A good place to start is to obtain material from industry associations and review the Web sites of the company's major competitors.) Use this information to determine the extent to which your skills and experience can be helpful and to figure out how much effort you will need to devote to learning the business.

* Read the company's audit committee charter. Understand the committee's assigned breadth of responsibilities and whether there are incremental duties over and above those of traditional audit matters.

* Speak to current and former committee members. Ask them how long they have served, their background, how much time they devote to committee service, their perspective on the key issues affecting the company and what additional resources are available to the committee.

* Estimate your time commitment. Make your own estimate of how much time you will need to devote to carry out the duties to your satisfaction and that of the company. Make sure the requirements fit comfortably with your own personal situation.

* Evaluate your independence. Are you, your firm and your other clients independent of the company whose audit committee you want to join? CPAs should check carefully to make sure they have no conflicts of interest before joining the board.

Armed with this information, CPAs can make an informed decision on whether they want to become part of the new vanguard in corporate governance Sarbanes-Oxley has created.

Directors and Ethics

* Some 81% of companies have conducted ethics and compliance training for their employees.

* Only 27% have held any such training sessions for their boards of directors.

* About 55% of the executives surveyed say their directors are not engaged enough in major ethical issues involving the company.

Source: Conference Board survey of ethics, human resources and legal officers,

Audit Committee/Director Resources

The AICPA has created an "audit committee matching system" (ACMS) for members who are interested in set/rag on the audit committee or board of directors of a public, private, not-for-profit or public-interest entity. AICPA members can register with the ACMS at Organizations looking for audit committee members will be able to visit the ACMS and search for candidates. Both parties are responsible for their own due diligence.

The AICPA is also creating an audit committee tool kit, including forms and checklists, to help make a committee actionable. The kit will be available late in the third quarter or early in the fourth quarter of 2003. Its availability will be announced through The CPA Letter and the AICPA Weekly Update and other means. The kit will be supported by a Web site within called the Center for Audit Committee Effectiveness. All tools will be downloadable from the Web site, and users are encouraged to tailor them to their own needs.

In early 2004 the AICPA also expects to launch an audit committee competency model within the AICPA Competency Self-Assessment Tool. The model will allow audit committee members, and those in the organization that work closely with them, to assess their skills--an important step in understanding the committee's effectiveness.


* CPAs considering joining the audit committee of a corporate board of directors should make sure they understand the industry the company operates in, particularly if it is one with special considerations, such as the insurance industry.

* Be aware that audit committee service can involve a time commitment that goes beyond the hours spent attending meetings. This includes reading reports and other materials prepared by management, reviewing financial statements, internal audit reports and correspondence from the company's external auditors.

* Before accepting an offer to join an audit committee, CPAs should make sure they and their firm are independent of the company and its management. The requirements in Sarbanes-Oxley make it particularly important to check for any real or apparent conflicts of interest.

* Prospective committee members should research the company thoroughly before accepting an invitation to serve as a director. This includes reading prior annual reports, talking to current and past board members, speaking with employees and interviewing the company's external auditors.

STEPHEN A. SCARPATI, CPA, CLU, ChFC, is a senior managing partner at 180[degrees] Management in New York City. He heads the firm's audit committee advisory service. His e-mail address is
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Article Details
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Author:Scarpati, Stephen A.
Publication:Journal of Accountancy
Date:Sep 1, 2003
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