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teristics.” Auditing: A Journal of Practice and Theory 19, No. 2 (Fall 2000), pp. 47“66.
Summary: Abbott and Parker find that independent and active audit committee mem-
bers are more likely to select an industry-specialist auditor because they demand a high
level of audit quality. Their results suggest that an industry-specialist auditor helps min-
imize the client™s reputational or monetary losses.
McDaniel, Linda, Roger D. Martin, and Laureen A. Maines, “Evaluating Financial Re-
porting Quality: The Effects of Financial Expertise vs. Financial Literacy.” Accounting Re-
view 77 (Supplement 2002), pp. 139“167.
Summary: The authors conclude that the requirement for financial experts on audit
committees is more likely to change the structure and focus of audit committee dis-
cussions about the quality of the financial reporting process. Their results suggest that
audit committee members who are financially literate are more likely to focus on re-
porting treatments that are prominent in the press and nonrecurring, while financial ex-
perts are more likely to focus on the relevance of reporting treatments as well as
recurring activities.
Carcello, Joseph V., and Terry L. Neal, “Audit Committee Characteristics and Auditor
Dismissals Following ˜New™ Going-Concern Reports.” Accounting Review 78, No. 1 (Jan-
uary 2003), pp. 95“117.
Summary: Carcello and Neal find as a follow-on to their 2000 study that the higher the
percentage of affiliated directors on the audit committee, the more likely a client will
dismiss its independent auditors because of a going-concern audit report. Moreover,
they report that the probability of client dismissal of the independent auditors subse-
quent to the going-concern report increases as audit committee ownership of client
stock increases. In contrast, audit committee members with more governance expertise
are less likely to dismiss their independent auditors after receiving a going-concern re-
port. Likewise, the turnover rate of independent audit committee members who retain
their independent auditors is less significant compared to audit committee members
who dismiss their independent auditors.
36 Corporate Accountability: The New Environment

Exhibit 1.7 Summary of Sections of the Sarbanes-Oxley Act of 2002 Impacting
Audit Committees

Sections Title
2 Definitions
101 Public Company Accounting Oversight Board
201 Services Outside the Scope of Practice of Auditors
202 Preapproval Requirements (audit and nonaudit services)
203 Audit Partner Rotation (5-year rotation period)
204 Auditor Reports to Audit Committees
206 Conflicts of Interest (1-year cooling-off period)
207 Study of Mandatory Rotation of Registered Public Accounting Firms
301 Public Company Audit Committees
302 Corporate Responsibility for Financial Reports
303 Improper Influence on Conduct of Audits
307 Rules of Professional Responsibility for Attorneys
401 Disclosure in Periodic Reports
402 Enhanced Conflict of Interest Provisions (Personal Loans to Executives)
403 Disclosures of Transactions Involving Management and Principlal
404 Management Assessment of Internal Controls
406 Code of Ethics for Senior Financial Officers
407 Disclosure of Audit Committee Financial Expert
409 Real Time Issues Disclosures
906 Corporate Responsibility for Financial Reports (Failure of Corporate
Officers to Certify Financial Reports and Criminal Penalties)

Source: The act is contained in Public Law No. 107-204, July 30, 2002.
Corporate Accountability and the Audit Committee 37

Exhibit 1.8 Summary of SEC Releases Issued to Implement the Provisions of the
Sarbanes-Oxley Act of 2002, Relating to Audit Committees (as of June 2003)

Release No. Date Title
34-46421 August 27, 2002 Ownership Reports and Trading by Officers,
Directors and Principal Security Holders
33-8124 August 28, 2002 Certification of Disclosures in Companies™
Quarterly and Annual Reports
33-46685 October 18, 2002 Proposals Regarding Improper Influence on
Conduct of Audits
33-8138 October 22, 2002 Proposals Regarding Internal Control Reports
33-8176 January 22, 2003 Conditions for Use on Non-GAAP Financial
34-47225 January 22, 2003 Insider Traders During Pension Plan Blackout
33-8177 January 23, 2003 Disclosure Regarding Audit Committee Finan-
cial Experts and Company Codes of Ethics
33-8180 January 24, 2003 Retention of Records Relevant to Audits and
33-8182 January 28, 2003 Disclosure About Off-Balance Sheet
33-8183 January 28, 2003 Strengthening the Commission™s Requirements
Regarding Auditor Independence
33-8185 January 29, 2003 Implementation of Standards of Professional
Conduct for Attorneys
33-8212 March 21, 2003 Certification of Disclosure in Certain Exchange
Act Reports
33-8177a March 26, 2003 Disclosure Required by Sections 406 and 407 of
Sarbanes-Oxley Act of 2002
33-8220 April 9, 2003 Standards Relating to Listed Company Audit
34-47672 April 11, 2003 Self-Regulating Organizations; Notice of Filing
of Proposed Rule Changes and Amendment No.
1 thereto by the NYSE Relating to Corporate
2003-66 May 27, 2003 SEC Implements Internal Control Provisions of
Sarbanes-Oxley Act
33-8238 June 5, 2003 Management™s Reports on Internal Control Over
Financial Reporting and Certification of Disclo-
sure in Exchange Act Periodic Reports

Source: www.sec.gov/rules/final/htm; www.sec.gov/new/press/htm; and www.sec.gov/rules/
Exhibit 1.9 Corporate Accountability: Self-Assessment Checklist

Sarbanes-Oxley Act
Board of Directors
Services available

External Auditors
Internal Auditors

Legal counsel


Audit Committee Practice Area Comments
Legal liabilities under,
State statutes

Fiduciary liability

Business judgment rule

Standards of conduct
Federal Statutes*
” ””
Sarbanes-Oxley Act of 2002
Private Securities Litigation Reform
” ”
Act of 1995
” ”
Securities Act of 1933
” ”
Securities Exchange Act of 1934

Legal Cases
Corporate Governance Principles
and Rules
” ”
” ”
Number of members (size)


Term of Service
” ”
” ”

Meetings, frequency and type
Knowledge Areas

Type of business and industry

Internal audit process

External audit process
” ”
Internal control concepts‡
” ” ”
Management™s risk assessment
” ” ”
Industry accounting practices
” ” ””
Complex business transactions
” ” ”
Financial reporting process
” ” ””””””
Internal communication process§
External communication process

See Chapter 4 and Appendix D in this book™s website for other acts.

Board resolution or corporate bylaws and a format written charter.

Includes conflicts of interest (e.g., code of conduct, related party transactions).
Related to the above areas.

Sources and Suggested Readings 39

American Assembly, Corporate Governance in America, Pamphlet 54 (New York: Colum-
bia University, April 1978).
American Institute of Certified Public Accountants, Audit Committees, Answers to Typical
Questions about Their Organization and Operations (New York: AICPA, 1978).
Barlas, Stephen, “Blue Ribbon Panel Focus: Audit Committees.” Management Accounting
80, No. 6 (December 1998), p. 10.
Bean, James W., “The Audit Committee™s Readings.” Journal of Accountancy 187, No. 1
(January 1999), pp. 47“54.
Beresford, Dennis R., “After Enron: Let™s Not Throw Out the Baby,” CPA Journal 72, No.
7 (July 2002), pp. 10“13.
Biegler, John C., “Rebuilding Public Trust in Business.” Financial Executive 45 (June
1977), pp. 23“31.
Bishop, William G., Dana R. Hermanson, Paul D. Lapides, and Larry E. Rittenberg, “The
Year of the Audit Committee.” Internal Auditor 57, No. 2 (April 2000), pp. 46“51.
Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees,
Report and Recommendations of the Blue Ribbon Committee on Improving the Effective-
ness of Corporate Audit Committees (New York: NYSE and Washington DC: National As-
sociation of Securities Dealers, 1999).
Braiotta, Louis, and Jay R. Olson, “Guiding the Audit Committee: A CFO™s Concern.” Fi-
nancial Executive 51, No. 9 (September 1983), pp. 52“54.
Bull, Ivan, “Board of Directors Acceptance of Treadway Responsibilities.” Journal of Ac-
countancy 171, No. 2 (February 1991), pp. 67“72, 74.
The Business Roundtable, Corporate Governance and American Competitiveness (New
York: The Business Roundtable, 1990, 2002).
The Business Roundtable, Principles of Corporate Governance (Washington, DC: The
Business Roundtable, 2002).
Castellano, Joseph F., Harper A. Roehm, and Albert A. Vondra, “Audit Committee Com-
pliance with the Treadway Commission Report: A Survey.” Ohio CPA Journal 48, No. 4
(Winter 1989), pp. 37“42.
DiPiazza, Samuel A., and Robert G. Eccles, Building Public Trust: The Future of Corpo-
rate Reporting (New York: John Wiley & Sons, 2002).
Estey, John S., and David W. Marston, “Pitfalls (and Loopholes) in the Foreign Bribery
Law.” Fortune (October 1978), pp. 182“188.
Fleming, John M., “Audit Committees: Roles, Responsibilities, and Performance.” Penn-
sylvania CPA Journal 73, No. 2 (Summer 2002), pp. 29“32.
Goodman, Amy L., and Michael J. Scanlon, “Enhanced Audit Committee Responsibilities.”
Insights, The Corporate & Securities Law Advisor 15, No. 2 (February 2001), pp. 12“17.
Hermanson, Dana R., “Does Corporate Governance Really Matter? What the Research
Tells Us.” Internal Auditing 18, No. 2 (March/April 2003), pp. 44“45.
Hills, Roderick M., “Restoring Faith with Audit Process.” Directors & Boards 26, No. 3
(Spring 2002), pp. 26“37.
Hnatt, Kelly M., “Forge the Right Relationship.” Journal of Accountancy 191, No. 5 (May
2001), pp. 49“54.
40 Corporate Accountability: The New Environment

Kalbers, Lawrence P., and Timothy J. Fogarty, “Audit Committee Effectiveness: An Em-
pirical Investigation of the Contribution of Power.” Auditing: A Journal of Practice & The-
ory 12, No. 1 (Spring 1993), pp. 24“49.
Kirk, Donald J., “Experiences with the Public Oversight Board and Corporate Audit Com-
mittees.” Accounting Horizons 14, No. 1 (March 2000), pp. 103“111.
Lear, Robert W., “Auditing the Audit Committee.” Chief Executive 139 (November 1998),
pp. 16“17.
Levitt, Arthur, “The Numbers Game,” speech presented at the NYU Center for Law and


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