In the wake of the Enron scandal and the resulting focus on corporate governance and financial reporting, the role of the public company audit committee continues to evolve. Today's audit committees are under enormous pressure to expand their roles and assume greater responsibility in all aspects of financial reporting and disclosure. Audit committee members should expect continued action in this arena in the form of forthcoming legislation and rulemaking, as well as demands from stockholders and other constituents.
Since December 2001, the SEC has issued several releases addressing the transparency, accuracy and integrity of financial reporting. In addition, SEC Chief Accountant Robert Herdman has recently said that "the audit committee is central to ensuring the integrity of published financial statements on which investors rely," and SEC Chairman Harvey Pitt has recently called upon the NYSE and Nasdaq to review and strengthen existing audit committee and other corporate governance standards. As a result of the Chairman's request, Nasdaq has proposed modifications to several important corporate governance standards, including tightening the definition of an independent director and requiring approval of related-party transactions by the audit committee. We would also expect the NYSE to expand similarly its corporate governance rules affecting audit committees and other matters. Current SEC rules and/or stock exchange listing criteria require the adoption of an audit committee charter, a standing audit committee consisting of no fewer than three independent members, the periodic publication of an audit committee charter and the inclusion of an audit committee report in a company's proxy statement.
We recommend that, as an initial matter, you (1) working together with outside counsel, inform the members of the audit committee of these new developments, (2) review the composition of your audit committee, taking into account the evolving definitions of "independence" and "fiscal literacy," and (3) review the regular conduct and practices of your audit committee to ensure compliance with existing rules and laws and best practices. In short, the world is changing for audit committees. Today's audit committee members must be prepared for ever-increasing roles and responsibilities in all aspects of financial reporting and disclosure.
David Berger and Katharine Martin are members of Wilson Sonsini Goodrich & Rosati, Professional Corporation, in Palo Alto, California, specializing in corporate governance. Michael Weisberg is an associate at Wilson Sonsini Goodrich & Rosati, Professional Corporation. Their website can be found at http://www.wsgr.com.