♣ to the audit committee, as in the GM case. NYSE requirements require the audit committee to discuss policies with respect to risk assessment and risk management. However, the NYSE commentary clarifies that the “audit committee is not required to be the sole body responsible for risks assessment and management” [See Part I, Exhibit C Rule 303A.07(b)(iii)(D)]. If the board allocates risk responsibilities to the audit committee, these responsibilities should be thoughtfully addressed in the charter. Members should carefully guard against accepting responsibilities beyond those mandated by appropriate governing organizations for which they do not have either time or expertise.
♣ Before serving, consider the time commitment. The NYSE provides this advice to prospective members: “Because of the audit committee's demanding role and responsibilities, and the time commitment attendant to committee membership, each prospective audit committee member should evaluate carefully the existing demands on his or her time before accepting this important assignment.” [Commentary to NYSE Rule 303A.07(a)] Furthermore, under the NYSE rule, if an audit committee member simultaneously serves on the audit committees of more than three public companies, the listed company must determine and disclose that the simultaneous service does not impair the ability of the member to effectively serve. ♣ Check out your protections. The state of incorporation, contracts, insurance, and company bylaws all impact the legal and financial protections available in a specific case. In general, a committee member may find the legal protections are very favorable when investors claim a breach of the duties of care or loyalty. For example, the GM court noted that under Delaware law: “Pleadings, even specific pleadings, indicating that directors did a poor job of overseeing risk in a poorly-managed corporation do not imply director bad faith. …show more content…
This case presents a classic example of the difference between allegations of a breach of the duty of care (involving gross negligence) as opposed to the duty of loyalty (involving allegations of a bad-faith conscious disregard of fiduciary duties). The conduct at issue here, as pled, falls short of an utter failure to attempt to establish information or reporting systems, a conscious failure to monitor existing systems, or conduct otherwise taken in bad faith (p. 17). ♣ Address all the duties in the Charter and review it periodically. Audit committee members should thoroughly understand the charter under which they operate and be certain that they can and do cover everything required. Once a duty is established in the charter, the audit committee may find it challenging to defend itself if it appears the members overlooked or ignored such duty. Both the NYSE and NASDAQ require their listed companies to have a written charter. NASDAQ requirements go a step further and require the company to review and reassess its written charter on an annual basis. Even if not mandated, the practice of reviewing the charter annually to ensure scheduling and completion of all of duties is sound advice. Summary. The suggestions by the authors provided in this series are summarized below with references to the supporting applicable case or rule. These are not intended to cover all responsibilities or considerations of the audit committee. For example, the independence of the committee members is an important consideration, but is beyond the scope of this series. Before Accepting a Position on the Audit Committee: • Consider the time commitment and responsibilities. • Consider the number of other audit committees on which you serve. • Perform due diligence of the company and ask about past notices …show more content…
• Use your authority to engage independent counsel and other advisers, as the audit committee determines necessary to carry out its duties. Consider whether senior management and/or the audit firm may be implicated and whether outside counsel unaffiliated with the company is warranted.
• Follow up on significant warning signals, such as reports from the auditor, internal audits, and SEC investigations.
• Ensure that the committee has appropriate funding determined by the audit committee for compensating the independent auditor, advisers employed by the committee, and ordinary administrative expenses necessary or appropriate in carrying out its duties, as required by SEC Rule 10A-3(b)(4).
• See SEC Rule 10A-3; Lernout III; In re AgFeed; In re Veeco; NYSE Rule 303A.07(b)(iii)(A) – (H).
Review and Perform All Other Duties:
• Review all duties required by law, listing requirements, and the Audit Committee
♣ Before serving, consider the time commitment. The NYSE provides this advice to prospective members: “Because of the audit committee's demanding role and responsibilities, and the time commitment attendant to committee membership, each prospective audit committee member should evaluate carefully the existing demands on his or her time before accepting this important assignment.” [Commentary to NYSE Rule 303A.07(a)] Furthermore, under the NYSE rule, if an audit committee member simultaneously serves on the audit committees of more than three public companies, the listed company must determine and disclose that the simultaneous service does not impair the ability of the member to effectively serve. ♣ Check out your protections. The state of incorporation, contracts, insurance, and company bylaws all impact the legal and financial protections available in a specific case. In general, a committee member may find the legal protections are very favorable when investors claim a breach of the duties of care or loyalty. For example, the GM court noted that under Delaware law: “Pleadings, even specific pleadings, indicating that directors did a poor job of overseeing risk in a poorly-managed corporation do not imply director bad faith. …show more content…
This case presents a classic example of the difference between allegations of a breach of the duty of care (involving gross negligence) as opposed to the duty of loyalty (involving allegations of a bad-faith conscious disregard of fiduciary duties). The conduct at issue here, as pled, falls short of an utter failure to attempt to establish information or reporting systems, a conscious failure to monitor existing systems, or conduct otherwise taken in bad faith (p. 17). ♣ Address all the duties in the Charter and review it periodically. Audit committee members should thoroughly understand the charter under which they operate and be certain that they can and do cover everything required. Once a duty is established in the charter, the audit committee may find it challenging to defend itself if it appears the members overlooked or ignored such duty. Both the NYSE and NASDAQ require their listed companies to have a written charter. NASDAQ requirements go a step further and require the company to review and reassess its written charter on an annual basis. Even if not mandated, the practice of reviewing the charter annually to ensure scheduling and completion of all of duties is sound advice. Summary. The suggestions by the authors provided in this series are summarized below with references to the supporting applicable case or rule. These are not intended to cover all responsibilities or considerations of the audit committee. For example, the independence of the committee members is an important consideration, but is beyond the scope of this series. Before Accepting a Position on the Audit Committee: • Consider the time commitment and responsibilities. • Consider the number of other audit committees on which you serve. • Perform due diligence of the company and ask about past notices …show more content…
• Use your authority to engage independent counsel and other advisers, as the audit committee determines necessary to carry out its duties. Consider whether senior management and/or the audit firm may be implicated and whether outside counsel unaffiliated with the company is warranted.
• Follow up on significant warning signals, such as reports from the auditor, internal audits, and SEC investigations.
• Ensure that the committee has appropriate funding determined by the audit committee for compensating the independent auditor, advisers employed by the committee, and ordinary administrative expenses necessary or appropriate in carrying out its duties, as required by SEC Rule 10A-3(b)(4).
• See SEC Rule 10A-3; Lernout III; In re AgFeed; In re Veeco; NYSE Rule 303A.07(b)(iii)(A) – (H).
Review and Perform All Other Duties:
• Review all duties required by law, listing requirements, and the Audit Committee