While there are many requirements and expectations of an issuer’s audit committee, the 1934 Exchange Act under rule 10A(3) mandates five specific standards in order for a company to be listed.
1. Independence – each member of the audit committee must be a member of the Board of Directors of the listed issuer, and must otherwise be independent:
– there can be no consulting, advisory or compensatory relationship, outside of that as a member
– members of the AC can not be affiliated persons as defined of the issuer or any subsidiary.
2. Responsibility – the audit committee, as a sub-committee of the Board of Directors must be directly responsible for the appointment, consultation with, and retention of the registered independent accounting firm, while including oversight including problem resolution between management and the auditor.
3. Complaint Resolution – the AC must establish procedures for addressing complaints received by the issuer including anonymous submission by employees.
4. Advisers – the AC must have the authority to engage advisers, including accountants, auditors, attorneys and consultants they feel are reasonable and necessary to carry out the duties of the committee.
5. Funding – the issuer must provide appropriate funding to allow the AC to carry out their duties as a committee of the Board of Directors.
Our experience has been that if there is a failure in meeting the requirements for an audit committee established by the ’34 Act it typically is for one of two reasons: first, and most common there is often confusion as to who the auditor should be responsible to – the AC or management. All too frequently, the unofficial role that management can play in the selection of the auditor becomes significant. Second, is the ‘step-child’ status many audit committees relegate complaint resolution too. this absolutely can not be the case if the issuer is going to minimize exposure, considering our litigious society.