Professional Documents
Culture Documents
Komite Audit
Komite Audit
Responsibilities
Chapter V
Chapter Objectives:
Provide an overview of the functions of board committees.
Understand the roles and responsibilities of board committees.
Be aware of the objectives of establishing board committees.
Become familiar with the duties, responsibilities, and composition of the
audit, compensation, nominating, governance, and special committees.
Understand the process and emerging practices for the election of corporate
directors.
Key Terms
Audit committee
Compensation committee
Enterprise risk management
Governance committee
Nominating committee
Special committee
Strategic board
Succession planning
Tone at the top
Whistleblower
9-15
Audit Committee
Lawmakers (SOX), regulators (SEC rules), and listing standards
of national stock exchanges (NYSE, Nasdaq, AMEX) generally
require public committees to have an audit committee, which
must be composed of independent directors with no personal,
financial, or family ties to management.
Standards Relating to Listed Company Audit Committees
outline these requirements, which relate to:
1)
2)
3)
4)
5)
Audit Committee
Relationships with Others
Audit Committee
Board of Directors
Audit Committee
Management
Audit Committee
External Auditors
Audit Committee
Internal Auditor
Works with other committees, assists board by bringing specialization and expertise
in the areas of financial reporting, internal controls, risk management, and audit
activities.
1939
1940
SEC recommends that companies form audit committeesAccounting Series Release (ASR) No. 19
1967
AICPA Executive Committee Statement on Audit Committees of Board of Directors recommends the
establishment of audit committees
1970
1972
1973
1974
1976
Committees chaired by Senator Lee Metcalf and Congressman John Moss complete their investigations into
the accounting profession AICPA forms Commission on Auditors Responsibilities (Cohen Commission)
1977
1978
1985
AICPA Cohen Commission issues Commission on Auditors Responsibilities: Report, Conclusions, and
Recommendations. AICPA forms a special committee to consider the adoption of an audit committee
requirement. NYSE requires companies with common stock issues registered on NYSE to have an audit
committee
1987
Congressman John D. Dingell convenes the first of a series of hearings into the effectiveness of
independent auditors
1988
1989
SECs five commissioners, by a narrow vote, decide not to require all public companies to have audit
committees,
but encourage their formation. Statement on Auditing Standards (SAS) No. 61, Communication with the
Audit Committees.
The National Association of Securities Dealers (NASD) approves a requirement that National
Market System
companies (a subset of the over-the-counter market) must have audit committees.
Statement on Internal Auditing Standards No. 7 (SAIS No. 7) Communication with the Board
of Directors
1991
1992
Committee of Sponsoring Organizations of the Treadway Commission (COSO) issues Internal ControlIntegrated Framework
1993
Public Oversight Board of the AICPAs SEC Practices Section releases In the Public Interest
1994
Kirk Panel (Public Oversight Board of the AICPAs SEC Practices Section) releases Strengthening the
Professionalism of the Independent Auditor
1995
Public Oversight Board of the AICPAs SEC Practices Section releases Allies in Protecting Shareholder
Interests
1998
SEC Chairman Arthur Levitt delivers speech at the NYU Center for Business and Law in which he calls for
the
NYSE and Nasdaq to form a blue ribbon committee to study the role of the audit committee
1999
Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate
Audit Committees. SAS No. 90, Audit Committee Communications. SEC Release No. 34-42266: Audit
Committee Disclosure. NYSE and Nasdaq adopt new listing requirements, mandating the existence,
composition, director qualifications,
and duties of an audit committee
2000
2001
2002
Sarbanes-Oxley Act
2003
SEC Release Nos. 33-8177 and 34-47235: Disclosure Required by Sections 406 and 407 of the SarbanesOxley
Act of 2002. SEC Release Nos. 33-8220 and 34-47654: Standards Relating to Listed Company Audit
Committees. SEC approved amendments to NYSE and the Nasdaq corporate governance listing
standards.
Audit Committee
Composition
Audit committee composition is discussed in terms of size,
independence, qualifications, attributes, and resources:
Audit Committee Size - The size of the committee usually
ranges from three to six members, whereas the SEC rule and
listing standards for public companies require at least three
independent members and should be composed for at least three
months.
Audit Committee Independence - The audit committee should
be composed of independent, nonexecutive, outside directors.
The emerging corporate governance guidelines on audit
committee independence should assist public companies in
avoiding potential conflicts of interest due to committee
members excessive contractual or consulting ties to the
company or its management.
Audit Committee
Composition
Member Qualifications - At least one member of the audit
committee should be designated as a financial expert. The
companys board of directors should apply the SECs
definition and consider audit committee members experience
and knowledge in determining which members qualify as
financial experts and, if none qualify, recruit at least one
member who meets the required qualifications.
Audit Committee Authority/Resources - SOX, recognizing
the increased responsibilities assigned to audit committees,
authorizes them to engage independent counsel and other
outside advisors as they determined necessary and requires
the company to provide appropriate funding for such advisors.
governance
Internal controls
Financial reporting
Audit activities
Code of ethics conduct
Whistleblower program
Enterprise risk management
Financial statement fraud
Audit Committee
Meetings
A combination of formal audit committee meetings with the
presence of senior executives and executive meetings with
just internal and/or external auditors should improve the
effectiveness of audit committee oversight functions.
The audit committee should meet at least four times a year to
review the companys quarterly financial reports and as
needed to address other important issues.
Compensation Committee
The compensation committee is usually formed to determine the
compensation and benefits of directors and executives.
Structure: The committee should be composed of all independent
directors who rotate periodically.
Responsibilities: committees have a set of responsibilities which
they need to follow stricktly.
Proxy Statement Disclosure: The committee is directly
responsible for ensuring that all aspects of executive
compensation are fully and fairly disclosed in in the annual proxy
statement.
Committee responsibilities:
1. Evaluation of directors.
2. Design and implementation of director compensation
plans.
3. Evaluation of senior executives.
4. Design and implementation of executive compensation
plans.
Compensation Committee
(Cont)
Performance metrics typically used by the compensation
committee include:
a. Earnings per share (EPS)
b. Cash flow
c. Total shareholder return (TSR)
d. Return metrics
e. Economic profit or economic value added (EVA)
f. Revenue
g. Operational metrics
h. Qualitative factors
SEC
rules
require
proper
disclosure
of
executive
compensation without imposing or even assessing the nature
and extent of the companys executive compensation thats
why all everything the compensation committee does should
be properly disclosed.
Corporate Governance
Committee
The corporate governance committee should be composed of
both executive and nonexecutive directors and be responsible
for developing and monitoring the companys governance
principles, including the roles and responsibilities of directors
and officers.
The corporate governance committee should be in charge of
establishing the agenda for the companys board of directors
to determine what the board should discuss with management
and to what extent.
The corporate governance committee should provide
sufficient information to the board to enable it to effectively
review the companys performance.
The information should consist of both financial and
nonfinancial measures of its performance, its comparison
with the industrys best practices, and the companys budget.
Nominating Committee
The nominating committee is usually responsible for
evaluating and nominating a new director to the board, and it
also facilitates the election of the new director by
shareholders.
The nominating committee is responsible for
(1) reviewing the performance of current directors;
(2) assessing the need for new directors;
(3) identifying and evaluating the skills, background, diversity,
and knowledge of candidates;
(4) having an objective nominating process for qualified
candidates;
(5) assisting in the election of qualified new directors.
Conclusion
Listing
Conclusion
The
composition of
the audit committee, including size,
independence, qualifications, and resources, can have a significant
impact on its effectiveness.
At least one of the members of the audit committee should be
designated as a financial expert.
Audit committee responsibilities may be grouped into the following
categories: corporate governance, internal controls, financial
reporting, audit activities, code of ethics conduct, whistleblower
programs, enterprise risk management, and financial statement fraud.
Audit committee reports to shareholders include, among other
things, a description of audit committee responsibilities, its activities
and accomplishments, and its self-assessment of how well it has
discharged its assigned responsibilities.
Responsibilities of the compensation committee can be generalized
into three categories: (1) evaluating the performance of directors and
senior executives, (2) designing and implementing compensation
plans for directors and executives, and (3) disclosing the activities of
the compensation committee.
Conclusion
Listing standards of national stock exchanges and best practices
require a formal annual evaluation process for the board of directors,
each major committee of the board, and each member of the board
committees.
The compensation report should fully disclose the companys
compensation policies.
The corporate governance committee should be composed of both
executive and nonexecutive directors.
The corporate governance committee should be in charge of
establishing the agenda for the companys board of directors to
determine what the board should discuss with management
and to what extent.
The corporate governance committee should provide sufficient
information to the board to enable it to effectively review the
companys performance. The information should consist of both
financial and nonfinancial measures of its performance, its
comparison with the industrys best practices, and the companys
budget.
The nominating committee is responsible for the proper composition
of the board, including director independence, skills, diversity, and
commitment.