Role of an Audit Committee—Especially for a Public Company

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Historically, the audit committee has always had the role of oversight and monitoring management and the outside auditor. Now, through recent listing requirements for the various stock exchanges and NASDAQ, the SEC has greatly strengthened the role of the audit committee. As a result of these changes, the audit committee is to be viewed as part of the formation of a "three-legged stool," consisting of the audit committee, management and the independent auditors, with the audit committee to be deemed the most important leg of the stool (Hecht, 2002). Recently, especially in light of the Enron scandal, the SEC's Chief Accountant has furnished guidance on what he considers helpful to the proper and effective functioning of an audit committee. An audit committee must have three important qualities (Hecht, 2002): (i) control of its agenda;

(ii) exercise diligence; and
(iii) the ability to ask the hard questions.
Perhaps the most important function is that the audit committee diligently discharges its function to ensure the integrity of the issuer's financial statements through perseverance, earnestness, attention to detail, and thoroughness. To do this, the audit committee should be proactive in analyzing information it receives from management and have a full understanding of the key accounting issues for that particular company (Hecht, 2002). Would the financial statements have been different if the independent auditor prepared them without any input from management? Do the financial statements furnish all of the information needed by existing and potential shareholders in order to be in a position to make an intelligent investment decision? Also, would the issuer have followed the same internal audit procedures if the partner in charge of the outside auditor were in fact the CEO (Hecht, 2002). The audit committee is an integral element of public accountability and governance. It plays a key role with respect to the integrity of the entity’s financial...
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