Survey shows audit committee improvement and need for improvement (11.30.07).

A new survey of outside auditor experiences with corporate governance and audit committees since the passage of Sarbanes-Oxley shows improved audit committee diligence, and room for more improvement. The survey can be found at http://papers.ssrn.com/so13/papers.cfm?abstract_id=1014029.

The survey was prepared by three university accounting professors, who asked questions of thirty audit managers and partners from three of the Big 4. The survey population, which was relatively small, did not include audit committee members, CFOs, CEOs, internal auditors or board members in general.

I found three survey discussion areas or comments to be of interest:

1. Management (including the CEO) is still equally or primarily dominant to the audit committee with respect to auditor selection and retention, although for public companies Sarbanes-Oxley designates that responsibility to the audit committee.

2. At page 30, the survey quotes one of the surveyed partners commenting about the benefit of having audit committee members from diverse backgrounds, and that on a good audit committee not everyone has to be financially savvy. The partner further comments about a few audit committees what have attorney members who were not financially savvy but who really ask some great questions.  The comment could be interpreted as implying that some audit committees, including those without attorney members, do not ask great questions.  Of course, any audit committee member who lacks sufficient "financial savvy" will have a more difficult time understanding issues and information pertaining to accounting and auditing matters, and making decisions relating to those matters.

3. The survey also indicates an overall respondent belief that the audit committee generally does not help resolve disputes with management. There was a general expectation that disputes would be resolved between management and the auditor, and that only the resolution, and perhaps the various alternatives, would be discussed with the audit committee. Comments also indicate a reluctance by some in management to make the audit committee aware of disputes, and to mention disputes, if at all, only if they are perceived to be material. There was a propensity to bring a dispute to the audit committee’s attention, if at all, only at the stage after it had become a very serious matter between management and the auditor.  The audit committee can avoid that type of situation by making it known that the committee will ask management and the auditor about all important issues, disagreements and disputes, whether financially material or less than financially material in amount, including those that were resolved by management and the auditor.  The audit committee may also request the auditor to discuss with the committee all information, or additional information, that the auditor believes the audit committee should know.