NYSE Sets Audit Committees on New Road: It's No Longer Business as Usual for Audit Committee Members and Auditors
Headline, grabbing accounting scandals such as the ones at WorldCom, Adelphia Communications, Global Crossing and, of course, Enron, cost investors hundreds of millions of dollars and thousands of employees their jobs. Corporate financial executives, internal auditors, audit committee members, external auditors--and all accounting professionals--need to be aware of the new corporate governance rules the New York Stock Exchange (NYSE) has proposed to help the audit committees and external auditors of companies listed on the Big Board address the weaknesses that led to accounting and corporate reporting failures. As CPAs study and prepare to work with the proposed standards, which will provide better checks and balances for companies' financial reporting and audit oversight, they will have opportunities--as auditors in relationships with audit committees and as corporate governance advisers in both audit and nonaudit engagements--to help those companies evaluate their audit committee practices, effect improvements where necessary and promote policies to provide value for shareholders. And perhaps most important--because each member of an audit committee must be financially literate and at least one committee member must have accounting or related financial management expertise---CPAs can showcase their knowledge and skills, and contribute to an improved corporate culture, by agreeing to serve on these committees. RAISING THE BAR On August 1, 2002, the NYSE's board of directors approved amendments to its listing standards and filed the proposed rules with the SEC on August 16; a public comment period must elapse before the commission votes and gives its final approval. The proposed rules are aimed at restoring investor confidence by enhancing company accountability and strengthening corporate governance. A key provision in the NYSE amendments would make a company's audit committee responsible for oversight of external auditors and give it sole authority to approve all audit engagement fees and terms, as well as all significant nonaudit engagements for the outside auditors. (The text of the proposal is available at www.nyse.com/about/report.) The amendments, which also include requirements for public companies and their directors that go beyond those aimed at audit committees, would appear in the NYSE manual for listed companies under "Corporate Governance Standards" (as new section 303A). In the meantime the Nasdaq filed rules similar to those of the NYSE-and also awaits SEC approval. (For information on related regulations from Congress and the SEC, see "Regulations Under the Sarbanes-Oxley Act," JofA, Oct.02, page 33.) The proposed standards would affect all companies whose stocks trade on the NYSE and also business organizations in noncorporate forms, such as limited partnerships, business trusts and REITs (real estate investment trusts), subject to the exchange's jurisdiction. Existing audit committee requirements would apply during the transition to the new rules. The proposed rules broaden the audit committee's authority with respect to the integrity of a company's financial statements and the independence of outside auditors--even though the audit committee does not certify the financial statements or guarantee the external auditor's report. Two significant requirements in the proposed NYSE listing standards address the independence of corporate boards of directors, from whose ranks the audit committees are drawn, and fee payment to audit committee members. * A redefinition of the "independence" requirement. The board of a listed company would be required to have a majority of independent directors, but all the members of the board's audit committee would have to be independent. (The audit committee would continue to have a minimum of three members.) The exchange tightened its definition of independent director: For an individual to qualify as independent, a company's board of directors must affirmatively determine he or she has no material relationship with the listed company either directly or as a partner, shareholder or officer of an organization that has a relationship with the company. …