NYSE Publications Guiding Principles for Audit Committee Best Practices
Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees
Letter From the Chairmen
Overview and Recommendations
The Case for Timely and Practical Action
The Audit Committee as Catalyst for Effective Financial Reporting
Guiding Principles for Audit Committee Best Practices
Appendix A Press Releases
Appendix B December 9, 1998 Public Hearing Schedule
Appendix C Sample Audit Committee Charters
Bibliography As we noted at the outset of this Report, the Committee believes that the proper functioning of an audit committee relies first on the entire board, and then specifically on the audit committee members' attitude toward their own role. If an audit committee is determined to be diligent in its oversight role, a sure sense of appropriate action will follow; credible diligence is not rocket science. In fact, the specifics of how any audit committee conducts its business should be self-determined. Since each company has its own unique circumstances -- type of business, industry, competitive environment, stage in the business cycle and business risks -- audit committee practices will vary naturally. By recognizing the need for this variance, and by capturing it in uniquely appropriate policies, audit committee members go a long way toward fulfilling their responsibilities. This process, in turn, is an excellent discipline for the audit committee.
Therefore, in lieu of specifying a litany of best practices to _which every audit committee should adhere, the Committee outlines "Guiding Principles" for best practices -- a catalog of common sense _fundamentals that apply regardless of an individual company's situation. The Committee intends the following Principles to serve as building blocks for devising company-specific processes and practices, and _ultimately for the committee's charter. Again, we encourage audit committee members to study the various more detailed recommendations contained in the publications referenced in Appendix C and the Bibliography to this Report.
Principle 1: The Audit Committee's Key Role in Monitoring the Other Component Parts of the Audit Process
In its oversight capacity, the audit committee is neither intended nor equipped to guarantee with certainty to the full board and shareholders the accuracy and quality of a company's financial statements and accounting practices. Proper financial reporting, accounting, and audit functions are collaborative efforts conducted by full-time professionals dedicated to these purposes. The audit committee, as the first among equals, oversees the work of the other actors in the financial reporting process -- management, including the internal auditor, and the outside auditors -- to endorse the processes and safeguards employed by each. In particular, the audit committee should encourage procedures that promote accountability among these players, ensuring that management properly develops and adheres to a sound system of internal control, that the internal auditor objectively assesses management's accounting practices and internal controls, and that the outside auditors, through their own review, assess management and the internal auditor's practices.
The audit committee should seek to affirm the existence of these nexuses of accountability by learning the roles and responsibilities of each of these participants. These roles and responsibilities should be commonly understood and agreed to by each of the other participants in the process -- preferably in writing.
From this basic understanding of the relevant roles and responsibilities of each participant in the process, the audit committee will be in a position to devise appropriate questions as to how each participant carries out its functions. These questions should not be merely a "checklist" of…