1.5 Audit Committee in the USA
Traditionally, directorate audit committees were first
proposed in 1939 as a direct
result of the Mckesson & Robbins
scandal and in 1940 by the New York Stock
Exchange ( NYSE) and the Securities and Exchange
Commission (SEC), were not
70
widely used for many years. Revived interest in audit
committees began with a
recommendation for their use by the executive committee
of the AICPA in 1967
which stated: 'that publicly owned corporations
appoint committees composed
of out side directors (those who are not officers or
employees) to nominate the
independent auditors of the corporation' s financial
statements and to discuss the
71
auditor's work with them.
68 . A .Chambers , ' Tolley ' s Corporate governance'.
69 . The Turnbull Report is guidance to directors on
implementing the section on
Internal control within the Combined Code.
70 .J . Baden , ' The Developing role of Audit Committees
'internal control'.
71. A . Chambers , ' Tolley ' s corporate governance'.
Moreover, the audit committee' s members shall meet
the requirements of the
72
NYSE, the SEC and any other applicable law or
regulation. The audit committee
shall be independent non executive directors and
shall meet at least four times
73
annually or more frequently as circumstances dictate. In
2002,the Sarbanes-Oxley
Act (SOA) operated an important reform
on the Accounting Industry. On the other
hand, the New York Exchange ( NYSE ) submitted a rule
filing to the SEC which
includes new proposed corporate governance Standards
intended to be codified in a
74
new section 303A of the Exchange's Listed Company Manual.
The SOA established a new law against executives who commit
corporate fraud and
increase the Securities and Exchange Commission ( SEC)
budget for auditors and
investigators; the law is also intended to restore
investor confidences in US market
75
after the 2001' s scandals. This reform was a land mark
event, representing the most
76
important changes in the Federal Securities laws since
the 1930s. However, even if
there are some common points between the new US corporate
governance standards
and the Combined Code, the new proposed US Standards do not
distinguish between
77
'Principles' and `Provisions'. The scope of these new
proposed US Standards is thus
much narrower than the scope of the UK's Combined Code
which gives much more
comprehensive coverage of essential elements of
corporate governance; the
proposed US Standards appear to be a focussed `fix'
designed to address almost
exclusively the corporate governance weakness revealed by
the recent US corporate
78
debate. Section 303 A of the new proposed US
Standards requires that listed US
companies must have a majority of independent directors not
merely non-executive.
72.Norman E . Auebach, ' Audit Committees New Corporate
Institution'
73.A.Chambers,'Tolley's Corporate governance'.p.1145
74.ibid
75.A.Chambers,'Tolley's corporate governance'.
76.ibid
77. ibid
78. ibid
The proposed new US Standards elaborate upon
the criteria to assess
`independence' whereas in the UK independence is
expressed simply as:
... independence of management and free from any business
or other relationship
79
which could materially interfere with the exercise of their
independent judgement.
Non - executive directors considered by the board to be
independent in this sense
80
should be identified in the annual report. A. Chambers points
out another element of
comparison between the new proposed US Standards and the
UK Combined Code.
In the UK it is for the board to decide whether a
director is independent, indeed the
guidance to the US proposed Standards also states that the
concern is `independence
81
from management' and a proposal Standards reads:
`No director qualifies as «independent «unless the
board of directors affirmatively determines that the directors 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).
82
Regarding the specific criteria, the new proposed US
Standards provides as follows:
`No director who is a former employee of the listed company
can be «independent»
until five years after the employment has ended.
No director who is, or in the past five years has been,
affiliated with or employed by
a (present or former) auditor of the company (or of an
affiliate) can be independent
until five years after the end of either the
affiliation or the auditing relationship.
No director can be» independent» if he or she is, or
in the past five years has been, part of an interlocking directorate in which
an executive officer of the listed company
serves on the compensation committees of another company that
concurrently employs the director.
Director with immediate family members in the foregoing
categories are likewise subject to the five years «cooling-off»
provisions for purposes of determining
«independence».
79 . A. Chambers , ' Tolley ' s corporate governance'.
80. Combined Code `Provision A 3.2.
81 A . Chambers , ' Tolley ' s corporate governance'.
82.New Proposed US Standards 2.(a),(i) to (iv).
In practice, there are many other possible impediments
to independence; notable
amongst the above four given criteria is the introduction of a
past audit relationship as
an impediment to independence; it is also notable
that, in the third independence
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tests, interlocking directorships are seen as an
impediment to independence.
Under the new proposed Standards, all members of the
audit committee should be
independent directors. According to this section, the audit
committee is sole authority
to hire independent auditors, and to approve any
significant non-audit relationship
with the independent auditors and it must set clear
hiring policies for employees or
84
former employees of the independent auditors'. In
addition, the new proposed
Standards prescribes that the audit committee must receive at
least annually a report
on the independent auditor's quality control and
information about certain inquiries
85
and investigations of the independent auditor
within the last five years.
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