How to make audit committees more effective;

              How to Make Audit Committees
More Effective
by ROBERT M, SHEHAN/Partner in Charge, Chicago
As we enter the 1980s, boards As of directors are no longer fac-ing the important question of whether or not to establish an audit committee. Nearly every significant corporate board in the U.S. already has one. In fact, 97 percent of the member companies of the American Society of Corporate Secretaries that responded to a 1978 survey on this issue {on behalf of the New York Stock Exchange) said that they had such a committee. No, the real ques-tion facing corporate boards today is how to make these audit committees more effective.
Having observed the evolution and the increasing responsibilities of the corporate audit committee over the past 25 years, I have been inn-pressed that the typical committee functioned rather routinely and per-haps somewhat superficially for a long time. Only in the past decade has an awareness of the committee's responsibilities and its role in cor-porate governance been heightened.
In the early I970's there was a rash of well publicized bankruptcies and management frauds In more recent times there has been a rather large number of bribery and questionable-
payments cases relating to foreign operations. Legislation such as the Foreign Corrupt Practices Act and an increased interest in and regulation of financial reporting by the SEC have prompted a great number of hereto-fore inactive audit committees to rec-ognize and to take more seriously the broader scope of their duties. The intent of this article is to consider those factors which I believe contrib-ute significantly to an effective audit committee process. In examining my personal experiences, I tan conclude that audit committees and the audit process are generally most effective ii five elements are present:
• A qualified and committed mem-bership.
• A clear definition of committee responsibilities.
m Management support of the audit process,
a A constructive role by the exter-nal auditor.
• An objective and independent external auditor,
A Committed Membership
It is easy to conclude that all mem-bers of the audit committee should, ideally, be financially ori-
ented in order for the committee to be most effective. How else can members not trained in accounting and auditing be expected to under-stand such matters as accounting principles and procedures, generally accepted audit standards, control sys-tems FASB pronouncements, and the reporting rules of the SEC or other regulatory bodies?
However, because an audit com-mittee depends largely on the inde-pendent public accountant to apply the generally accepted accounting principles and to conform with I he rules and regulations governing financial reporting and disclosure, I do not believe that such financial expertise is required The committee, however, should understand the alternative methods available for applying accounting principles and for developing financial statements and footnote disclosures.
There are certain attributes, I be-lieve, which eminently qualify persons for audit committee mem-bership, regardless of accounting or financial background.
• An awareness of the nature of the audit process.
• A general knowledge of business
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