Advice on Audit Committees. - Brief Article - Review - book review

Internal Auditor, Feb, 2000 by Louis Braiotta Jr.

The Audit Committee Handbook-- Third Edition

IN THE AUDIT COMMITTEE Handbook, author Louis Braiotta Jr. aims to provide useful information, guidance, and practical suggestions for audit committee members and to identify opportunities for auditors and management to improve their service to the audit committee. In at least some aspects, this new, third edition of the Handbook does provide limited help and enlightenment.

The first section of the book, for example, includes historical and legal background related to audit committees. The perspectives of various professional and regulatory agencies on the role of audit committees are included, along with a detailed summary of auditing and accounting standards. Since all audit committee members should know the basis for their authority, this segment of the book would be useful to directors who are new to audit committees. The author also discusses recent developments in the area of corporate governance and accounting standards. Coverage of the recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees and the endorsement of international accounting standards by the International Organization of Securities Commissions are included, for example.

Unfortunately, the depth and value of the book is, otherwise, questionable. Many of the checklists in the book are extracts from accounting standards or other available sources. Tools used by many audit committees, such as summaries of defalcations, surveys of practices in overseas markets, conflict-of-interest questionnaires, and audit committee self-evaluations, are not discussed.

A significant part of the handbook deals with audit committee responsibilities for monitoring internal control. I was dismayed that the first page on this subject began with an AICPA definition of internal control from 1949 and went on to provide updates on AICPA opinions as a historical perspective. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) definition of internal control was finally quoted, and the executive summary is provided in an Appendix. Most internal auditors, who have been using coso as a training and education tool for management and directors for some time, will be disappointed by the understatement of its importance in this book.

The section dealing with the evaluation of the internal audit organization by the audit committee relies heavily on the AICPA Statement on Accounting Standards 65 (SAS 65) and, as a special assignment, suggests that the independent accounting firm be asked to provide a written opinion on the internal audit function. There is no mention of the requirement for quality assurance reviews, and the author states that "independent auditors have requisite auditing knowledge and objectivity" to evaluate internal audit quality. Many internal auditors might question the choice of the independent auditor as the ideal party for assessing the practice of internal auditing, especially since objectivity may be elusive in today's environment of outsourcing.

Outsourcing itself is covered only briefly. Quotes from the IIA's Statement on Internal Auditing Standards 18 (SIAS 18) and the Institute's Standards for the Professional Practice of Internal Auditing are offered, and the author suggests reviewing the independent auditor's comments on internal auditing personnel to facilitate discussion on the subject. If one new subject needs open, objective discussion and expansion for audit committee members, it is surely that of outsourcing. What is acceptable? Can a figurehead chief auditor or independent accountant providing the majority of internal audit services be objective about internal audit quality?

While sections on fraud, the Foreign Corrupt Practices Act, conflicts of interest, and perquisites are somewhat useful, only in the latter does the author suggest using internal auditing to report to the committee. In other areas the independent accountant is suggested as a resource. In my experience, internal auditing is the prime resource for audit committees in these matters because of our in-depth knowledge of the entity's culture, which impacts these areas.

One of my disappointments with the Blue Ribbon Committee report lies in the fact that it ignored the important role that internal auditors play in orchestrating audit committee activities in many corporations. The report implied that the public accounting profession is the standard setter for corporate governance and the prime resource to audit committees, which is contrary to my opinion and to what I have observed in practice. I concede that it was difficult for me to be objective about this section--and perhaps even about the book--because it also promotes the independent accountant as the prime audit committee resource.

There are significant gaps in the book with regard to what many audit committees are doing today. For example there is little mention of risk management as a tool. There is no mention of forecast and budget targets as a useful mechanism, despite the fact that, since financial markets respond to expectations of earnings vs. actual results, many audit committees and independent accountants use performance against forecast results as a way to determine actual result quality.