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(Scope of committee™s reviews)
(Summary of the committee™s review activities in chronological order)
(Summary of the committee™s recommendations)
Respectfully Submitted,

Signed by: ________________________
(Name of chairman)
(Names of other committee
members)
(Attachments, if appropriate)
396 The Audit Committee™s Report and Concluding Observations


proxy statements. Such action exemplifies the committee™s role as representatives
of the stockholders. An example of the committee™s report of Wal-Mart Stores,
Inc., is shown in Exhibit 14.2.5


5
In 1987, the National Commission on Fraudulent Financial Reporting recommended that “the Secu-
rities and Exchange Commission require all annual reports to stockholders to include a letter from the
chairman of the audit committee describing the committee™s responsibilities and activities.” For fur-
ther reference, see the Report of the National Commission on Fraudulent Financial Reporting (Wash-
ington, DC: NCFFR, 1987). In addition, in 1988, the MacDonald Commission in Canada supported
the recommendation of the National Commission on Fraudulent Financial Reporting: “Indeed, we
would go further. We advocate a publicly stated mandate from the board to the audit committee. The
committee™s annual reporting to the shareholders would then describe specifically what it did to dis-
charge its mandate.” See the Report of the Commission to Study the Public™s Expectations of Audits
(Toronto: Canadian Institute of Chartered Accountants, 1988), p. 36. For further reference, see Mari-
lyn R. Kintzel, “The Use of Audit Committee Reports in Financial Reporting,” Internal Auditing 6,
No. 4 (Spring 1991), pp. 16“24; and Frank Urbancic, “The Usefulness of Audit Committee Reports:
Assessments and Perceptions,” Journal of Applied Business Research 7, No. 3 (Summer 1991), pp.
36“41. As noted in Chapter 10, Exhibit 10.1, the Blue Ribbon Committee on Improving the Effective-
ness of Corporate Audit Committees recommends that the SEC require all reporting companies to in-
clude a letter from the auditee in the company™s annual report to shareholders and Form 10-K Annual
Report (see Chapter 2 for further details).




Exhibit 14.2 Audit Committee Report of Wal-Mart Stores, Inc.

Wal-Mart™s Audit Committee consists of three directors, each of whom is “independent”
as defined by the current listing standards of the New York Stock Exchange. The members
of the Committee are Stanley C. Gault, Roland A. Hernandez, who is the Committee™s
chairperson, and J. Paul Reason. The Audit Committee is governed by a written charter
adopted by the Board. Given the current trends in corporate governance, recent legislation
by Congress, and the proposed New York Stock Exchange corporate governance listing
standards, the Audit Committee and the Board recently adopted a revised Audit Commit-
tee charter in March 2003. A copy of the revised charter is available on our website at
www.walmartstores.com.
Wal-Mart™s management is responsible for Wal-Mart™s internal controls and financial
reporting, including the preparation of Wal-Mart™s consolidated financial statements. Wal-
Mart™s independent auditors are responsible for auditing Wal-Mart™s annual consolidated
financial statements in accordance with generally accepted auditing standards and ensur-
ing that the financial statements fairly present Wal-Mart™s results of operations and finan-
cial position. The independent auditors also are responsible for issuing a report on those
financial statements. The Audit Committee monitors and oversees these processes. The
Audit Committee annually recommends to the Board for its approval an independent ac-
counting firm to be Wal-Mart™s independent auditors. Beginning with the June 6, 2003
shareholders™ meeting, ratification of the Board™s approval of the independent auditors is
being sought. Ernst & Young LLP is Wal-Mart™s current independent auditor.
As part of the oversight process, the Audit Committee regularly meets with manage-
ment, the outside auditors, and Wal-Mart™s internal auditors. The Audit Committee often
meets with these groups in closed sessions. Throughout the year, the Audit Committee had
full access to management, and the outside and internal auditors for the Company. To ful-
fill its responsibilities, the Audit Committee did the following:
Concluding Observations 397



• reviewed and discussed with Wal-Mart™s management and the independent auditors
Wal-Mart™s consolidated financial statements for the fiscal year ended January 31,
2003;
• reviewed management™s representations that those consolidated financial statements
were prepared in accordance with generally accepted accounting principles and fairly
present the results of operations and financial positions of the Company;
• discussed with the independent auditors the matters required by Statement on Auditing
Standards 61, including matters related to the conduct of the audit of Wal-Mart™s con-
solidated financial statements;
• received written disclosures and the letter from the independent auditors required by In-
dependence Standards Board Standard No. 1 relating to their independence from Wal-
Mart, and discussed with Ernst & Young LLP their independence from Wal-Mart;
• based on the discussions with management and the independent auditors, the indepen-
dent auditors™ disclosures and letter to the Audit Committee, the representations of man-
agement to the Audit Committee and the report of the independent auditors, the Audit
Committee recommended to the board that Wal-Mart™s audited annual consolidated fi-
nancial statements for fiscal year 2003 be included in Wal-Mart™s Annual Report on
Form 10-K for the fiscal year ended January 31, 2003 for filing with the Securities and
Exchange Commission;
• reviewed all non-audit services performed for Wal-Mart by Ernst & Young LLP and
considered whether Ernst & Young LLP™s provision of non-audit services was compat-
ible with maintaining its independence from Wal-Mart;
• recommended that the Board select Ernst & Young LLP as Wal-Mart™s independent au-
ditors to audit and report on the annual consolidated financial statements of Wal-Mart
filed with the Securities and Exchange Commission prior to Wal-Mart™s annual share-
holders meeting to be held in calendar year 2004; and
• consulted with advisors regarding the Sarbanes-Oxley Act of 2002, the New York Stock
Exchange™s proposed corporate governance listing standards and the corporate gover-
nance environment in general and considered any additional requirements placed on the
Audit Committee as well as additional procedures or matters that the Audit Committee
should consider.
The Audit Committee submits this report:

Stanley C. Gault
Roland A. Hernandez, Chairperson
J. Paul Reason


Source: Wal-Mart Stores, Inc. 2003 Annual Meeting and Proxy Statement, pp. 5“6.




CONCLUDING OBSERVATIONS
Over the past two decades, the audit committee of the board of directors has
evolved into a viable mechanism (an independent oversight group) in promoting a
high degree of integrity in both the internal and external auditing processes as well
as the financial reporting process. While the evolutionary process that created the
audit committee was relatively slow, the major impetus toward the mandatory es-
tablishment of the committee came from the New York Stock Exchange in June
1978. Its adoption of mandatory audit committees as a listing requirement on the
398 The Audit Committee™s Report and Concluding Observations


stock exchange has established standards to improve the accountability of corpo-
rate boards of directors and managers to their outside constituencies. Since the
adoption of the listing requirement, the stock exchange(s) of an increasing num-
ber of countries with developed or emerging equity markets have adopted audit
committees to increase transparency in their stock exchanges, which, in turn, helps
facilitate foreign investment. Indeed, it is reasonable to expect that this trend will
continue. The managements of stock exchanges have accepted the audit commit-
tee as a key mechanism within the corporate framework to help the board of di-
rectors not only address the needs of information users who rely on dependable
financial reporting but also properly discharge its financial and fiduciary respon-
sibilities to shareholders and other constituencies. Thus to the extent that the audit
committee can monitor the internal and external audit processes and understand
the perceived financial accounting information needs of the entity™s constituencies,
it can provide a balance in the corporate financial reporting process.
As Harold M. Williams, former chairman of the SEC, once stated in an address
before the Securities Regulation Institute:

Although the American Institute of Certified Public Accountants recently concluded
that it should not compel public companies to establish audit committees as a pre-
condition to obtaining an independent auditor™s certification, it reiterated its support
for the audit committee concept. In addition, the Foreign Corrupt Practices Act, and
the importance which it places on establishing mechanisms to insure that the com-
pany has a functioning system of internal accounting controls, has given added im-
petus to the audit committee movement.
Thus, at this point, the central task is to define the audit committee™s responsibilities
and enhance the quality of the committee™s work.6

In light of Williams™s comments, the first edition of this book was written to re-
spond to the central task of clearly defining the audit committee™s responsibilities
as well as to enhance the quality of the committee™s work. The audit committee is
fundamental to the improvement of the board of directors™ stewardship account-
ability to its constituencies.
It is clearly evident from the public and private sector initiatives in the 1980s
and 1990s as well as the Sarbanes-Oxley Act of 2002 that the concept of audit
committees has continued as an integral part of corporate governance and ac-
countability. Both sectors have recognized that audit committees have made im-
portant contributions in promoting the investing public™s confidence in the
integrity of the auditing processes and the financial reporting process. Equally im-
portant, audit committees have become a key element in the entity™s system of in-
ternal control to help engender a high degree of credibility of financial reporting,
which, in turn, helps safeguard the securities market. Their independent oversight
responsibility in the internal control environment helps to ensure the indepen-
dence of both internal and external auditors. As a result, the full board of directors
is assured of objective financial reporting by management.

6
Harold M. Williams, “Corporate Accountability”One Year Later,” address presented at the Sixth An-
nual Securities Regulation Institute, San Diego, California, January 18, 1979.
Concluding Observations 399


Future Perspectives Revisited
The 19 years since the first edition, 10 years since the second edition, and 5 years
since the third edition of this book were published have been years of dynamic
changes in corporate governance, particularly as it has affected audit committees.
In the author™s view, the future will continue to bring further changes and added
duties and responsibilities for members of audit committees.
The intent here is not to comment fully on each of these possible developments
but merely to use a “crystal ball,” presenting the views of one informed commen-
tator on audit committee activities since the third edition.

Reporting
• As recommended by the Treadway Report, reports of audit committees will in-
creasingly be included in corporate annual reports.
Reality Check: The Securities and Exchange Commission and the self-regula-
tory organizations now require that audit committees™s reports be included in
the annual proxy statement to shareholders.
• Corporate management will be required to include in its annual report a state-
ment about the adequacy of the company™s internal control, and the company™s
external auditors will be required to comment on that statement.
Reality Check: The Sarbanes-Oxley Act of 2002 and the SEC rules imple-
menting the act now require that the annual report contain a report on
management™s responsibility for internal controls and assessment of the effec-
tiveness of internal controls for financial reporting, including the independent
auditors™ attestation report on management™s assertion related to the annual
audit.
• Future legislation will require the external auditor to report to appropriate au-
thorities, such as the SEC, suspected illegalities discovered by the auditor if the
company™s management or board of directors (i.e., audit committee) fails to
take appropriate action.
Reality Check: The Private Securities Litigation Reform Act of 1995 requires
external auditors who detect illegal acts to report their findings to the SEC if
the client fails to take appropriate action on such acts that have a material ef-
fect on the financial statements. The Sarbanes-Oxley Act of 2002 established
a whistle-blower communication process.
• The form and content of financial statements will be revised over time, as sug-
gested by the Public Oversight Board. In addition, disclosures relating to busi-
ness risks and uncertainties will result in further disclosures in financial reports
and in modification to the standard auditor™s reports. Both of these factors will
have future implications for audit committees.
Reality Check: The Sarbanes-Oxley Act of 2002 replaced the Public Oversight
Board with the Public Company Accounting Oversight Board to oversee the
accounting profession.
• The Treadway Report included a recommendation that corporate audit com-
mittees have additional responsibilities with respect to an entity™s unaudited
400 The Audit Committee™s Report and Concluding Observations


quarterly earnings report. Although this recommendation has not been adopted
by many corporations, it is the author™s belief that audit committees™ oversight
in the future will include quarterly reporting to further ensure the integrity of
the interim reporting process.
Reality Check: The Sarbanes-Oxley Act of 2002 requires that the CEO and the
CFO must certify annual and quarterly reports, including disclosure controls
and procedures. The New York Stock Exchange has set forth the requirement
that the audit committee members discuss annual and quarterly financial state-
ments with management and the independent auditors.

Other Areas of Future Change
As noted in the 1988 Conference Board Research Report
Internal Auditing
(“The Audit Committee: A Broader Mandate”), audit committees are believed to
have significantly improved procedures and practices related to the internal audit-
ing function. It is expected that this will continue.
The report of the Treadway Commission recommended that all public companies
have an internal audit function. Despite this, many companies, particularly those in
the middle and small “cap” range, have not adopted this recommendation for a va-
riety of reasons, including those related to the current economic environment.
It is the author™s belief that there will be continued demand to require an inter-
nal audit function for all public companies. Furthermore, in those instances in
which it may not be economically feasible or practicable to establish a fully staffed
internal audit function, this service will be procured from outside firms that spe-
cialize in providing such services to the middle and small markets.
Reality Check: The New York Stock Exchange has set forth a requirement that
each listed company must have an internal audit function. Additionally, it is un-
lawful for independent auditors to provide internal audit outsourcing services to
SEC audit clients.

The Conference Board Report (“The
Enhanced Audit Committee Liability
Audit Committee: A Broader Mandate”) indicated that CEOs and CFOs could be
deemed to have a special responsibility or knowledge that could increase the pos-
sibility of their being sued in a class action. However, most believed that corporate
indemnification, D & O insurance, and state statutory protection would be suffi-
cient to offset the additional exposure.
Nevertheless, in view of increasing litigation against members of boards serv-
ing on corporate audit committees, it is prudent for audit committee directors to
follow the guidance of the Treadway Report and good audit committee practices,
as set forth in this book. It is increasingly important from a litigation point of view
for an audit committee to do its job well and to document that fact.
Reality Check: As indicated in Chapter 4, the audit committee legal liability
exposure is under both state and federal statutory laws. With the enactment of the
Sarbanes-Oxley Act, it is reasonable to expect that the committee™s enhanced legal
liability may be in the area of internal governance. For example, the audit com-
mittee should know when to retain the services of independent advisors. However,

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