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timate responsibility for these functions, the audit directors should monitor the
corporation™s activities based on their jurisdiction. The monitoring function should
be administered so that the planning function is accomplished. Consequently, the
committee can assist the board by obtaining information from the accounting and
auditing executives in order to discharge the board™s responsibility. The consensus
seems to be that the audit directors should monitor:

• The internal auditing function
• The internal control system and related business risks
• The financial reporting disclosures
• Conflicts of interest, ethics audit, and fraud audit activities
• Corporate perquisites
Corporate contributions38

• Information technology systems
• Other tasks as requested by the board

Ibid., Sec. 406.
The board of directors may request that the audit committee review corporate contributions to ensure
compliance with the corporate giving policy.
The Audit Committee Functions 67

In administering the monitoring function, it may be advisable for the committee to
retain the necessary professional expertise, such as the corporation™s outside legal
counsel or outside data processing experts.

S-Ox Section 806”Protection for Employees of Publicly Traded Compa-
nies Who Provide Evidence of Fraud
(a) IN GENERAL”Chapter 73 of title 18, United States Code, is amended by in-
serting after section 1514 the following:
Sec. 1514A. Civil action to protect against retaliation in fraud cases
TRADED COMPANIES”No company with a class of securities registered under
section 12 of the Securities Exchange Act of 1934 (15 U.S.C 78l), or that is required
to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(d))), or any officer, employee, contractor, subcontractor, or agent of such com-
pany, may discharge, demote, suspend, threaten, harass, or in any other manner dis-
criminate against an employee in the terms and conditions of employment because
of any lawful act done by the employee”
(1) to provide information, cause information to be provided, or otherwise assist
in an investigation regarding any conduct which the employee reasonably be-
lieves constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or
regulation of the Securities and Exchange Commission, or any provision of Fed-
eral law relating to fraud against shareholders, when the information or assistance
is provided to or the investigation conducted by”
(A) a Federal regulatory or law enforcement agency;
(B) any Member of Congress or any committee of Congress; or
(C) a person with supervisory authority over the employee (or such other
person working for the employer who has the authority to investigate, dis-
cover, or terminate misconduct); or
(2) to file, cause to be filed, testify, participate in, or otherwise assist in a pro-
ceeding filed or about to be filed (with any knowledge of the employer) relating
to an alleged violation of section 1341, 1343, 1344, or 1348, any rule or regula-
tion of the Securities and Exchange Commission, or any provision of Federal law
relating to fraud against shareholders.
(1) IN GENERAL”A person who alleges discharge or other discrimination by
any person in violation of subsection (a) may seek relief under subsection (c), by”
(A) filing a complaint with the Secretary of Labor; or
(B) if the Secretary has not issued a final decision within 180 days of the fil-
ing of the complaint and there is no showing that such delay is due to the bad
faith of the claimant, bringing an action at law or equity for de novo review
in the appropriate district court of the United States, which shall have juris-
diction over such an action without regard to the amount in controversy.
(A) IN GENERAL”An action under paragraph (1)(A) shall be governed
under the rules and procedures set forth in section 42121(b) of title 49,
United States Code.
68 Audit Committees: Basic Roles and Responsibilities

(B) EXCEPTION”Notification made under section 42121(b)(1) of title 49,
United States Code, shall be made to the person named in the complaint and
to the employer.
(C) BURDENS OF PROOF”An action brought under paragraph (1)(B)
shall be governed by the legal burdens of proof set forth in section 42121(b)
of title 49, United States Code.
(D) STATUTE OF LIMITATIONS”An action under paragraph (1) shall be
commenced not later than 90 days after the date on which the violation occurs.
(1) IN GENERAL”An employee prevailing in any action under subsection
(b)(1) shall be entitled to all relief necessary to make the employee whole.
(2) COMPENSATORY DAMAGES”Relief for any action under paragraph (1)
shall include”
(A) reinstatement with the same seniority status that the employee would
have had, but for the discrimination;
(B) the amount of back pay, with interest; and
(C) compensation for any special damages sustained as a result of the dis-
crimination, including litigation costs, expert witness fees, and reasonable at-
torney fees.
(d) RIGHTS RETAINED BY EMPLOYEE”Nothing in this section shall be
deemed to diminish the rights, privileges, or remedies of any employee under any
Federal or State law, or under any collective bargaining agreement.
(b) CLERICAL AMENDMENT”The table of sections at the beginning of chapter
73 of title 18, United States Code, is amended by inserting after the item relating to
section 1514 the following new item:
“1514A. Civil action to protect against retaliation in fraud cases.”39

S-Ox Section 303”Improper Influence on Conducts of Audits
(a) RULES TO PROHIBIT”It shall be unlawful, in contravention of such rules or
regulations as the Commission shall prescribe as necessary and appropriate in the
public interest or for the protection of investors, for any officer or director of an is-
suer, or any other person acting under the direction thereof, to take any action to
fraudulently influence, coerce, manipulate, or mislead any independent public or cer-
tified accountant engaged in the performance of an audit of the financial statements
of that issuer for the purpose of rendering such financial statements materially mis-
(b) ENFORCEMENT”In any civil proceeding, the Commission shall have exclusive
authority to enforce this section and any rule or regulation issued under this section.
(c) NO PREEMPTION OF OTHER LAW”The provisions of subsection (a) shall
be in addition to, and shall not supersede or preempt, any other provision of law or
any rule or regulation issued thereunder.
(d) DEADLINE FOR RULEMAKING”The Commission shall”

Ibid., Sec. 806.
The Audit Committee Functions 69

(1) propose the rules or regulations required by this section, not later than 90
days after the date of enactment of this Act; and
(2) issue final rules or regulations required by this section, not later than 270
days after that date of enactment.40

S-Ox Section 402”Enhanced Conflict of Interest Provisions
the Securities Exchange Act of 1934 (15 U.S.C. 78m), as amended by this Act, is
amended by adding at the end the following:
(1) IN GENERAL”It shall be unlawful for any issuer (as defined in section 2
of the Sarbanes-Oxley Act of 2002), directly or indirectly, including through
any subsidiary, to extend or maintain credit, to arrange for the extension of
credit, or to renew an extension of credit, in the form of a personal loan to or for
any director or executive officer (or equivalent thereof) of that issuer. An ex-
tension of credit maintained by the issuer on the date of enactment of this sub-
section shall not be subject to the provisions of this subsection, provided that
there is no material modification to any term of any such extension of credit or
any renewal of any such extension of credit on or after that date of enactment.
(2) LIMITATION”Paragraph (1) does not preclude any home improvement
and manufactured home loans (as that term is defined in section 5 of the Home
Owners™ Loan Act (12 U.S.C. 1464)), consumer credit (as defined in section
103 of the Truth in Lending Act (15 U.S.C. 1602)), or any extension of credit
under an open end credit plan (as defined in section 127(c)(4)(e) of the Truth in
Lending Act (15 U.S.C. 1637(c)(4)(e)), or any extension of credit by a broker
or dealer registered under section 15 of this title to an employee of that broker
or dealer to buy, trade, or carry securities, that is permitted under rules or reg-
ulations of the Board of Governors of the Federal Reserve System pursuant to
section 7 of this title (other than an extension of credit that would be used to
purchase stock of that issuer), that is”
(A) made or provided in the ordinary course of the consumer credit busi-
ness of such issuer;
(B) of a type that is generally made available by such issuer to the public;
(C) made by such issuer on market terms, or terms that are no more favor-
able than those offered by the issuer to the general public for such exten-
sions of credit.
does not apply to any loan made or maintained by an insured depository insti-
tution (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C.
1813)), if the loan is subject to the insider lending restrictions of section 22(h)
of the Federal Reserve Act (12 U.S.C. 375b).”41

Ibid., Sec. 303.
Ibid., Sec. 402.
70 Audit Committees: Basic Roles and Responsibilities

With respect to the internal audit function, the NYSE™s proposed listing stan-
dards (Section 303A(7)(e) provides that:

Each listed company must have an internal audit function.
Commentary: Listed companies must maintain an internal audit function to provide
management and the audit committee with ongoing assessments of the company™s
risk management processes and system of internal control. A company may choose
to outsource this function to a firm other than its independent auditor.42

The Reporting Function43 The audit committee should report directly to the
board of directors and not to the chief executive officer. Since the members are in-
dependent or nonmanagement directors, they provide an objective appraisal of
management™s accounting and auditing performance. Furthermore, the reporting
function is directly related to both the planning and monitoring functions. The
general content of the audit directors™ report should be based on the review pro-
grams regarding the planning function. Although the minutes of the committee
meetings are a record of the proceedings, the nature of its function warrants a for-
mal report. The report should contain a summary of its findings and recommen-
dations with the appropriate figures and narrative remarks. In developing the
reports for the board, the committee should focus its attention on the board™s in-
terests in such matters as:

• The financial accounting policies and the related industry accounting practices
(e.g., depreciation methods, inventory pricing, basis for consolidation)
• The reports of the independent auditors and the internal auditors (e.g., the au-
ditors™ opinion on the system of internal control)
• The reports of legal counsel with respect to significant commitments, contin-
gencies, and governmental compliance
• The reports of a special investigation concerning the review of the corpora-
tion™s financial affairs, such as political contributions

In short, the report of the audit committee may vary in form; however, the com-
mittee should render a concise report that fulfills the needs and interests of the

S-Ox Section 302”Corporate Responsibility for Financial Reports
(a) REGULATIONS REQUIRED”The Commission shall, by rule, require, for
each company filing periodic reports under section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)), that the principal executive officer
or officers and the principal financial officer or officers, or persons performing sim-
ilar functions, certify in each annual or quarterly report filed or submitted under ei-
ther such section of such Act that”

Securities and Exchange Commission, Release No. 34-47672; File No. SR-NYSE-2002-33, Pro-
posed Rule Change Relating to Corporate Governance (Washington, DC: SEC, April 11, 2003), p. 13.
For further discussion, see Chapter 14.
The Audit Committee Functions 71

(1) the signing officer has reviewed the report;
(2) based on the officer™s knowledge, the report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order to
make the statements made, in light of the circumstances under which such state-
ments were made, not misleading;
(3) based on such officer™s knowledge, the financial statements, and other finan-
cial information included in the report, fairly present in all material respects the
financial condition and results of operations of the issuer as of, and for, the peri-
ods presented in the report;
(4) the signing officers”
(A) are responsible for establishing and maintaining internal controls;
(B) have designed such internal controls to ensure that material information
relating to the issuer and its consolidated subsidiaries is made known to such
officers by others within those entities, particularly during the period in
which the periodic reports are being prepared;
(C) have evaluated the effectiveness of the issuer™s internal controls as of a
date within 90 days prior to the report; and
(D) have presented in the report their conclusions about the effectiveness of
their internal controls based on their evaluation as of that date;
(5) the signing officers have disclosed to the issuer™s auditors and the audit com-
mittee of the board of directors (or persons fulfilling the equivalent function)”
(A) all significant deficiencies in the design or operation of internal controls
which could adversely affect the issuer™s ability to record, process, summa-
rize, and report financial data and have identified for the issuer™s auditors any
material weaknesses in internal controls; and
(B) any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer™s internal controls; and
(6) the signing officers have indicated in the report whether or not there were sig-
nificant changes in internal controls or in other factors that could significantly af-
fect internal controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.
tion 302 shall be interpreted or applied in any way to allow any issuer to lessen the
legal force of the statement required under this section 302, by an issuer having rein-
corporated or having engaged in any other transaction that resulted in the transfer of
the corporate domicile or offices of the issuer from inside the United States to out-
side of the United States.
(c) DEADLINE”The rules required by subsection (a) shall be effective not later
than 30 days after the date of enactment of this act.44

S-Ox Section 906”Corporate Responsibility for Financial Reports


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