Audit, Compliance and Risk Blog

SEC Ponders Responsibilities For Board of Directors’ Audit Committees

Posted by Jon Elliott on Tue, Sep 15, 2015 of directors are responsible for governing their corporations. Many boards divide their work among committees. Committees often include an “audit committee,” with responsibilities that may include:

  • Usually – overseeing financial reporting, internal controls, business risks, and internal and external audit processes.

  • Sometimes – monitoring compliance with laws and regulations, the company’s code of ethical conduct, and dealings between the company and its Chief Executive Officer (CEO) and other officers and directors.

The US Securities and Exchange Commission (SEC), national securities exchanges, and the Public Company Accounting Oversight Board (PCAOB) impose minimum responsibilities and selection criteria for individual members of public company audit committees, and for committees overall. Many non-public corporations, partnerships and other enterprises voluntarily adopt many of the same expectations. I discussed existing SEC requirements here. Now, SEC has issued a “Concept Release” in which it recounts the history and present requirements for audit committees, and asks for public comments on 74 specific questions grouped into the following categories):

  • Audit committee oversight of auditors (6 questions). Should current audit committee reporting requirements be expanded, revised or reduced, to provide investors with useful information? Should the audit committee disclose its work in other areas, such as oversight of the financial reporting process or the internal audit function?

  • Communications between audit committees and auditors (11 questions). Should requirements to disclose whether certain types of communications occurred at all be revised, and should audit committees be required to disclose information about the contents of some categories of communication?

  • Meetings between audit committee and auditors (2 questions). Should the number and frequency of these meetings be disclosed, and if so should the disclosure identify the topics discussed?

  • Auditor’s internal quality review and most recent PCAOB inspection report (4 questions). Should the audit committee be required to disclose whether it reviewed and discussed these materials, and if so what types of disclosure would be appropriate?

  • Audit committee promotion of auditor’s objectivity and professional skepticism (2 questions). Would investors benefit from disclosures about such activities?

  • Procedures for appointing/retaining auditor (8 questions). What information should be disclosed about audit committee procedures, and whether or not the company conducts a shareholder vote to ratify the selection?

  • Qualifications of the audit firm(s) and members of the audit team (16 questions). What information should be disclosed about auditors’ general qualifications and experience with this company?

  • Location of audit committee disclosures in filings with SEC (3 questions). Would investors benefit from identification of specific location(s) in filings where audit committee disclosures are to be located?

  • Flexibility for smaller reporting companies and emerging growth companies (2 questions). What adjustments to existing and revised disclosure requirements would be appropriate for these companies?

  • Other categories of revised or additional disclosures (20 questions). SEC invites comments about additional categories of possible disclosures, including whether some categories of voluntary disclosures should be made mandatory, and whether issuers in some categories and/or sectors should become subject to additional targeted disclosure requirements?

Comments were due by September 8, 2015; SEC has not yet set a date for further action.

Self-Assessment Checklist

Does my company’s board of directors have an audit committee?

- If so, how is it constituted?

How many board members serve on the audit committee? 

Are all audit committee members “independent” of the company and its management?

- If not, how many are independent? 

Are all audit committee members “financial experts”?

- If not, how many are financial experts? 
- If so, is the audit committee responsible for overseeing auditors?

Are auditors hired, managed, and compensated directly by the audit committee?

Are auditors instructed to report all pertinent information, including those routine to the audit and preparation of audit reports, as well as any apparent accounting irregularities and/or securities law compliance violations, to the audit committee directly?

Does the audit committee require that public company accounting firms be registered with PCAOB?

Is the audit committee adequately funded?

Is the audit committee funded to hire, manage and pay auditors?

Is the audit committee authorized and funded to hire, manage and pay outside consultants and attorneys if it considers them necessary?

Does the organization provide disclosures from its audit committee, and if so how are disclosures made and to whom:

    • Disclosures mandated (e.g., by SEC and others if organization is a listed company)

    • Disclosures that are voluntary, but specified by bylaws or board policies.

    • Disclosures at the audit committee’s discretion.

Where Can I Go For More Information?

STP has recently published an update to its publication Directors' Liability in Canada and also publishes the following related guides:

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About the Author Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 25 years. He was involved in developing 12 existing products, including Environmental Compliance: A Simplified National Guide and The Complete Guide to Environmental Law.

Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).

Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).

You may contact Mr. Elliott directly at:

photo credit: 786257 via photopin (license)

Tags: Business & Legal, SEC, Accounting & Tax, Audit Standards