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as evidenced by other cases and in particular the Caremark International case, the
Concluding Observations 401

audit committee must demonstrate active oversight and due diligence in discharg-
ing its responsibilities.

Independent Advisors
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
sets forth a number of requirements with respect to audit committees, as noted
elsewhere in this book. It further requires larger depository financial institutions to
provide independent counsel to audit committees. The Treadway Report also rec-
ommended that audit committees have the authority to retain expert consultants or
advisors to assist them as needed in meeting their duties and responsibilities, or
possibly to evaluate the committee™s performance.
In view of the ever-expanding duties and responsibilities of audit committees
and, perhaps, increased liability in the future, it is not unreasonable to assume that
committees will increasingly seek outside independent advisors to assist them in
the effective performance of their charter.
Reality Check: As previously mentioned, the Sarbanes-Oxley Act of 2002 es-
tablishes a requirement for the retention of outside independent advisors by the
audit committee.
While the dynamic changes in corporate governance and the financial report-
ing needs of investors continue to impact the role and responsibility of audit com-
mittees, to limit the potential litigation risk, the board of directors should consider
the overall performance of the committee and reexamine periodically the terms of
reference in the committee™s charter, as set forth in this book.
Recognizing that audit committees have an independent oversight function
and operate on a part-time basis, the board and management should avoid diluting
the activities of the committee by inappropriately expanding the scope of its char-
ter. Thus the board should approve any modifications in the terms of reference of
the audit committee.
Clearly, the rapidly changing environment in both the corporate and financial
communities necessitates the need for a continuing education program for audit
committees. Such a program would enable the committee to cope with recent ac-
counting, auditing, and financial reporting developments and thus enable members
better to assist their full boards of directors with discharging their fiduciary re-
sponsibilities to the shareholders. The self-regulatory organizations (NYSE and
Nasdaq) have set forth recommendations regarding continuing education for
boards of directors and their standing committees. Professor Jane F. Mutchler has
proposed “a more holistic view of auditing.” She combines the dictionary defini-
tion of auditing and the definition of assurance services from the AICPA Special
Committee on Assurance Services (Elliott Committee):

an independent, methodological examination and review of a situation or condition
and a reporting of the results of the examination to improve the quality of informa-
tion or its context for decision makers.7

Jane F. Mutchler, “Report of the Chairperson,” Auditing Section/American Accounting Association,
Auditor™s Report 20 (Fall 1996), pp. 1“2.
402 The Audit Committee™s Report and Concluding Observations

Given this definition, Mutchler concludes:

If we view auditing in this context, a whole new world beyond financial statement
auditing opens up. Now we are talking about systems auditing, operational auditing,
ethics auditing, risk auditing, management auditing, business process auditing. This
not only provides a vision for new services to be offered but also, and perhaps more
important for our organization, provides a whole new vision for curriculum and re-
search issues.8

In a study dealing with boards of directors and corporate governance over the
next 10 years, Oxford Analytica reported with respect to the oversight function:

The key question regarding the oversight function of corporate boards concerns their
ability to discipline or even replace management for poor performance before a
company is overtaken by a crisis. This is no easy task: challenging the management
of a company, even if it is not performing well, requires board members to be well-
informed and confident. They are also very likely to need the backing of powerful
stakeholders as a counterweight to the power of the CEO.
Oversight is thus likely to be most effective where directors:
Possess and have a reputation for considerable expertise relevant to evaluating the
firm™s performance; and
Respond to the interests of major shareholders, or are individuals who enjoy the
backing of major shareholders.
Certain organizational and structural changes may enhance the ability of the board
to keep a watchful eye on management™s actions. The rise of the audit committee in
US, Canadian, and UK corporations is one of the most important such developments
and merits careful examination.9

Recently, both Corporate America and the accounting profession have come
under increased congressional scrutiny because of major accounting scandals that
have shaken the global capital markets. Since the Enron and WorldCom fallout, a
number of public and private sector institutions have issued reforms with respect to
audit committees and corporate governance. Presumably these reforms and the new
regulatory and legal framework will provide guidance and assistance to boards of
directors and their audit committee in effectively discharging their fiduciary re-
sponsibilities to shareholders. Likewise these reforms will enable audit committees
to maintain quality in their oversight of the audit processes and financial reporting
process to restore investor confidence in the financial reporting system.

Ibid., 2.
Oxford Analytica, Board Directors and Corporate Governance, Trends in the G7 Countries over the
Next Ten Years, Executive Report (Oxford: Oxford Analytica, 1992), p. 7. For an expanded discussion
of forward-looking activities of audit committees, see Arthur L. Ruffing, Jr., “The Future Role of the
Audit Committee,” Directors & Boards 18, No. 3 (Spring 1994), pp. 51“54. Also, the reader may wish
to review Exhibit D.1 in Appendix D on this book™s website to see the rise of audit committees in cer-
tain countries and to see the 1998 speeches on the Internet by Lynn Turner, chief accountant of the
SEC, that address the role of audit committees: www.sec.gov/news/speeches/spch226.htm.
Sources and Suggested Readings 403

This fourth edition has examined the chronological events and developments in
both the public and private sectors associated with audit committees. Such exam-
ination is essential in order to enhance their effectiveness. Given the increasing
pervasiveness and the number of audit committees, it is reasonable to expect that
they will continue to receive a high level of attention from the investing public.

Bacon, Jeremy, The Audit Committee: A Broader Mandate, Report No. 914 (New York: The
Conference Board, 1988).
Canadian Institute of Chartered Accountants, Report of the Commission to Study the Pub-
lic™s Expectations of Audits (Toronto: CICA, 1988).
Kintzel, Marilyn R., “The Use of Audit Committee Reports in Financial Reporting.” Inter-
nal Auditing 6, No. 4 (Spring 1991), pp. 16“24.
Mutchler, Jane F., “Report of the Chairperson.” The Auditor™s Report 20 (Fall 1996), pp. 1“2.
National Commission on Fraudulent Financial Reporting, Report of the National Commis-
sion on Fraudulent Financial Reporting (Washington, DC: NCFFR, 1987).
Oxford Analytica, Board Directors and Corporate Governance, Trends in the G7 Countries
over the Next Ten Years, Executive Report (Oxford: Oxford Analytica, 1992).
Ruffing, Arthur L., Jr., “The Future Role of Audit Committee.” Directors & Boards 18, No.
3 (Spring 1994), pp. 51“54.
Securities and Exchange Commission, Release No. 34-47672, Proposed Rule Change Re-
lating to Corporate Governance, April 11, 2003, www.sec.gov/ruls/SRO/34-47672.htm.
Urbancic, Frank, “The Usefulness of Audit Committee Reports: Assessments and Percep-
tions.” Journal of Applied Business Research 7, No. 3 (Summer 1991), pp. 36“41.
Wal-Mart Stores, Inc., 2003 Annual Meeting and Proxy Statement.
Wal-Mart Stores, Inc., 2003 Annual Report.
Williams, Harold M., “Corporate Accountability”One Year Later,” January 18, 1979. Ad-
dress presented at the Sixth Annual Securities Regulation Institute, San Diego, California.
Appendix A
Accounting, Auditing, and
Attestation Standards
Topical Index of References
to Accounting Principles
Board, Financial Accounting
Standards Board, Statement
on Auditing Standards,
Statement on Standards for
Attestation Engagements,
and Accounting Standards
Executive Committee
Pronouncements as of
June 30, 2003


APB Standard Interpretation SAS SSAE
Reference Reference Reference Reference Reference
Accounting/Auditing Topic Number Number Number Number Number

Accounting changes 20* 32,* 56, 73, 1, 20 58
Accounting estimate 20* 57
Accounting policies 22*
Accounts receivable and payable”interest on
transfers 21* 77 2 67
Accounts receivable confirmation 67
Adequacy of disclosurer in financial
statements 32
Agreed-upon procedures 4**
Analytical review procedures 56
Asset retirement obligations 143
Attestation standards 1*
Audited financial statements”other
information 8
Audit adjustments 89
Audit planning and supervision 22
Audit risk and materiality 47
Audit sampling 39
Audits of governmental entities 74
Auditors™ reports 26, 29, 35, 42,
50, 51, 58*, 97, 98
62, 69, 79, 87, 91, 95
Business combinations 16* 10, 38, 79, 141 4, 9*
Business segment report 14,* 18, 21, 21
24, 30, 131
Capitalization of interest cost 34,* 42, 58, 62 33
Cash flows 95,* 102, 104
Certain marketable securities 12,* 115 10,* 11, 12,
13, 16
Client representations 85
Communication between predecessor and
successor auditors 84,* 93
Communication with audit committees 61, 90
Compensated absences 43
Compliance auditing/attestation 68 3**
Comprehensive income 130
Computer software 86
Concepts of financial reporting Concept
Nos. 1“7
Consideration of omitted procedures 46
Consolidating variable interest entities 46
Contingencies and commitments 5,* 11 14, 34 12
Contribution received/made 116
Convertible debt 14 84
Deferred compensation plans 25 38
Depreciation 1 93,* 99
Development stage enterprise 7 5, 7
Disclosure of information about
capital structure 129
Disclosure of long-term obligation 47
Discontinued operations 30*
Early extinguishment of debt 26* 4,* 64,* 76, 84
Earnings per share 15* 21, 55, 85, 128 31
Evidential matter 31,* 80, 96 11
Exit or disposal activities 146


APB Standard Interpretation SAS SSAE
Reference Reference Reference Reference Reference
Accounting/Auditing Topic Number Number Number Number Number

Extraordinary items 30
Filing under Federal Securities Statutes 37
Financial forecasts and projections 1*
Financial instruments 105,* 107,* 119,* 39
126,* 133,* 137, 149, 150
Financial reporting and changing prices 39,* 40, 41,
33,* 46, 54,
82, 89,* 70
Fair value measurement 101
Financial statements-not-for-profit 117*
Foreign currency exchange 8, 20, 52 15, 17, 37
Franchise fee revenue 45
Fraud 99
Future contracts 80
Guarantor™s accounting 45
Illegal client acts 54
Impairment of long-lived assets 139, 144
Income taxes 11,* 23,* 9, 31, 37, 109 18, 22, 29
Inquiry of a client™s lawyer 12
Intangible assets 17* 44,* 72,* 121,* 142
Interim financial information 28* 3 100
Internal audit effects on the audit 65
Internal control”IT 94
Internal control”communication of weakness 55,* 60 2,** 6**
Investments in common stock 18* 94 35 92
Investments in securities 115, 124
Investment tax credit 2,* 4 25, 32
Leases 13,* 17,* 22, 19, 21, 23, 24,
23, 26,* 27, 26, 27
28, 29, 98
Letters for underwriters 72, 79, 86


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