Business Services Industry

Handbook offers audit committee guidance

Internal Auditor, June, 2004 by T. Mccollum

AFREE HANDBOOK FROM audit and risk management firm Jefferson Wells International aims to help audit committee members adapt to their more intensive role in corporate governance. Developed by a six-person team composed of board members from more than 15 large global companies, The Right Stuff: Seven Key Principles for Building an Effective Audit Committee includes strategies for dealing with corporate governance, internal control, and compliance issues related to the U.S. Sarbanes-Oxley Act of 2002.

1. TRACK THE TONE AT THE TOP. The audit committee and board of directors must influence the tone set by senior executives and monitor how it filters through the organization by assessing the integrity of senior management, ensuring that management promotes a code of ethics, instituting ethics training, and acting decisively on whistleblower reports.

2. STAY AHEAD OF SARBANES-OXLEY SECTION 404 REPORTING. Audit committees must understand how their organization's internal controls work, require independent verification of control deficiencies, and monitor and document the verification process.

3. CHAMPION THE INTERNAL AUDITOR. Audit committees should play a key role in mentoring and compensating chief internal auditors by assuring them a senior position within the company, reviewing their performance and compensation, providing career guidance, and evaluating the internal audit department's budget, staffing, recruitment, and training practices.

4. ENGAGE THE EXTERNAL AUDITOR. The audit committee--not management--should be the external auditor's client. Consequently, audit committees must actively oversee the external auditor's scope and activities and participate in the selection of the lead external auditor and audit fee negotiations.

5. DIG DOWN INTO THE BUSINESS. Because the audit committee must oversee the reliability and integrity of the company's financial statements and internal controls, committee members must understand the organization's business and competitive marketplace, including business risks and key performance indicators of each business unit.

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6. GET BEHIND THE NUMBERS. Audit committees should ensure that financial statements reflect the underlying economics of the business by understanding the accounting assumptions made by management, reviewing those assumptions over time, examining other indicators of business value, comparing those assumptions with those used by competitors, and assessing the skills and integrity of the chief financial officer, chief internal auditor, and external auditor.

7. DEFUSE RETIREMENT TIME BOMBS. Audit committees should review management's assumptions about the spending and cost growth of pension and retiree health plans, monitor how pension funds are invested, and scrutinize how retirement benefits are marketed to employees and how management is making reductions in retirement plans.

A copy of the handbook can be downloaded from www.jeffersonwells.com/inet/trs.>