Sarbanes-Oxley’s Audit Committee Deadline Sparks Fear, Loathing
from
What Directors Think 2003
by Randy Myers
As U.S. businesses work overtime to convince the public that they’ve improved their corporate governance practices, it’s easy to find CEOs publicly praising the Sarbanes-Oxley Act and its new mandates for audit committees. But in the trenches, where corporate directors are charged with making sure those mandates are implemented, reviews are much more mixed.
Many board members report good progress in staffing their audit committees with independent directors, establishing confidential whistleblower complaint systems, and putting audit committees in charge of the outside auditors. But there are still plenty of companies where directors are “kind of confused,” says University of Georgia accounting professor Dennis R. Beresford, former chairman of the Financial Accounting Standards Board and a director of three public companies (Kimberly-Clark, Legg Mason, and MCI). “At each company that I’m involved in,” he says, “we have charters that we’re updating and checklists we’re using, but it’s still hard to keep track of everything.”
With the deadline for meeting the new audit committee requirements still months away—companies have until their first annual shareholders’ meeting after January 15, 2004—directors seem most bothered by the rule that compels a public company to put a financial expert on its audit committee or explain to the investing public why it doesn’t have one. As defined by the Securities and Exchange Commission, the audit committee’s financial expert must, among other things, understand generally accepted accounting principles (GAAP). And that, says Thomas R. Beecher Jr., an attorney and the lead director of Albany International, a pulp and paper supplier, “is trying to raise board competency to an unreasonable level of knowledge. Getting anybody to accept that responsibility will not be easy unless they’ve just retired from an accounting firm.”
Though Albany International’s audit committee includes a former bank president and three other independent directors with good financial skills, Beecher says none of them are up to speed on all the latest mutations of GAAP, and he argues that to expect them to be “is silly, unrealistic, and unnecessary. I think what you want on an audit committee are people who are well grounded in financial matters and who will, certainly on accounting issues, rely on experts for their financial expertise.” Right now, says Beecher, Albany International’s board is not planning to identify any member as a financial expert in next year’s proxy statement and, in accordance with Sarbanes-Oxley’s requirements, will explain why, “probably in language similar to what I’ve just used.”
There are other areas of concern. Walter Schuetze, chairman of the audit committees at Computer Associates International and TransMontaigne Inc., an oil-pipeline outfit, says he believes both companies have been in early compliance with everything required by Sarbanes-Oxley. But Schuetze, a former chief accountant for the SEC, says he’s troubled by the law’s requirement that the audit committee not only engage but also “oversee” a company’s external auditors, and what that might imply. “When you use the word ‘oversee,’ to my mind, that implies I am actively looking over the shoulder of the external auditor, and in fact I
am not doing that,” he says. Beresford agrees. “The CFO and the controller are there on a full-time basis, and the outside auditors obviously spend a lot of time with them,” he says. “The audit committee is overseeing those functions, but is not and should not be micromanaging them.”
At some companies, the mandate to establish anonymous reporting systems for whistleblowers alleging financial irregularities is proving a challenge. J. Michael Cook, a former chairman and CEO of the accounting firm Deloitte & Touche, chairs the audit committees at three corporations: Comcast, International Flavors & Fragrances, and Rockwell Automation. He says that while those companies have already complied with most of the other new audit committee rules, putting the whistleblower provisions together has taken longer. One of the three chose to refine an existing system to accommodate the new mandates, another has been putting the finishing touches on a system that was started from scratch, and the third decided to simply outsource the program. Among their common worries is the danger of audit committees’ becoming bogged down in complaints not motivated by financial improprieties—from, say, an employee who doesn’t like the way his boss treated him last week.
Section 404 of Sarbanes-Oxley orders companies to disclose the effectiveness of their internal controls and requires their external auditors—who report, of course, to the audit committee—to attest to management’s assessment of those controls. This, too, worries some board members. “I am hearing stories, all anecdotal, of course, about how audit firms are saying this is a huge, huge undertaking that is going to cost literally millions and millions of dollars,” says Schuetze. “I saw Mr. Sarbanes and Mr. Oxley on TV recently, and they both were saying they didn’t intend for the requirements of 404 to be as rigid and rigorous as the accounting firms were interpreting it. But nonetheless, it is the public accounting firm that has to sign the certificate, not Mr. Sarbanes or Mr. Oxley. What I’m hearing about the requirements of Section 404 and the documentation that corporations must put in place suggests it is going to be very expensive.”
Not all directors are apprehensive. Harvard Business School professor Jay Lorsch, a member of the Computer Associates International board, suggests that when more companies have worked through the audit committee regulations, compliance may prove less troublesome than some expect. Harvard Business School has been holding educational seminars for audit committee chairmen, says Lorsch, “and with the exception of uncertainty over Section 404, I think people leave feeling pretty comfortable. My colleagues who actually teach accounting and control are pretty sanguine about it too. My general impression is that people are sort of worried about it in general, but when they get into it, they find it’s not as onerous as they might have expected.”
Depends on whom you’re talking to.
