Question

The Sarbanes-Oxley Act mandates that the audit committee of the board of directors of public companies be directly responsible for the appointment, compensation, and oversight of the external auditors. In addition, the audit committee must pre-approve all non-audit services that might be performed by the audit firm.

Discuss the rationale for this mandate as opposed to the alternative of letting the shareholders, CEO, or CFO have these responsibilities.

What factors should the audit committee consider in evaluating the independence of the external auditors?

Locate the proxy statement for a publicly traded company. Search for the disclosures pertaining to the audit committee members. Summarize and discuss your findings.

Answer 1

Answer:-

The audit committee must be directly responsible for the appointment, compensation, retention and oversight of the company’s independent accounting firm. With the authority to hire, fire and compensate the external auditor, the committee must work with the external auditors, internal auditors, and financial and executive management to make the independent audit process as effective as possible.

The main reason why such resposibilities are not assigned to Shareholders, CEO, CFO as, it requires an independent check over the work of external auditors, as all of the above mentioned person have substantial interest in company.

Our research indicates that 46 percent of audit committees have sought expertise, advice or training from outside advisors during the past six months.
An effective audit committee must have the necessary resources and authority to fulfill its function, including independent and objective advice on accounting, financial reporting, internal control or legal matters.

These features will not present with shareholders, CEO and CFOs of the company.

2. Each member of the audit committee of the issuer must be independent. Audit committee members are not allowed to accept any direct or indirect payments of consulting, advisory or other compensatory fees from the company or any subsidiary thereof, other than in the individual’s capacity as a member of the board of directors and any board committee.

all the above statement provides clear guide that why such resposibilites are not delegated to the shareholders, CEO and to the CFO of the company.

in short :

1. Independence

2. Expertise, & Sound Financial Knowledge.

3. non-Confliciting of Interest

4. And to comply with the provisions of Sarbanes-Oxley Act .

Evaluation of Independence of Auditors:-

The Sarbanes-Oxley Act of 2002 mandates that audit committees be directly responsible for the oversight of the engagement of the company's independent auditor, and the Securities and Exchange Commission (the Commission) rules are designed to ensure that auditors are independent of their audit clients.

To determine whether an auditor is independent under this standard an audit committee needs to consider all of the relationships between the auditor and the company, the company's management and directors, not just those relationships related to reports filed with the Commission.

The audit committee should consider whether a relationship with or service provided by an auditor:

(a) creates a mutual or conflicting interest with their audit client;
(b) places them in the position of auditing their own work;
(c) results in their acting as management or an employee of the audit client; or
(d) places them in a position of being an advocate for the audit client.

The Commission rules also address specific auditor independence issues, some of which are:

Specific Prohibited Non-audit Services

The auditor is prohibited from providing the following non-audit services to an audit client including its affiliates:

• Bookkeeping
• Financial information systems design and implementation
• Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
• Actuarial services
• Internal audit outsourcing services
• Management functions or human resources
• Broker-dealer, investment adviser, or investment banking services
• Legal services and expert services unrelated to the audit

In addition to the specific prohibited services, audit committees should consider whether any service provided by the audit firm may impair the firm's independence in fact or appearance.

Pre-approval of Permitted Services

Subject to certain limited exceptions, the audit committee must pre-approve all permitted services provided by the independent auditor (i.e., tax services, comfort letters, statutory audits or other). The Commission rules include certain pre-approval requirements that the audit committee must follow. In addition, the audit committee should be informed about the services expected to be provided by the audit firm to understand whether the audit firm's independence will be impaired.

The audit committee should consider whether company policies and procedures require that all audit and non-audit services are brought before the committee for pre-approval.

Also, listing company standards require audit committees to pre-approve all audit, review and attest services regardless of whether the firm performing the services is the company's principal auditor.

Prohibited Relationships:-

Certain relationships between audit firms and the companies they audit are not permitted as it jeopardize the independece of the auditor. Audit Committie should check whether any of these relationship is there :-

These include:

• Employment relationships. A one-year cooling off period is required before a company can hire certain individuals formerly employed by its auditor in a financial reporting oversight role. The audit committee should also consider whether the hiring of personnel that are or were formerly employed by the audit firm might affect the audit firm's independence.
  
• Contingent Fees. Audit committees should not approve engagements that remunerate an independent auditor on a contingent fee or a commission basis. Such remuneration is considered to impair the auditor's independence.
  
• Direct or material indirect business relationships. Audit firms may not have any direct or material indirect business relationships with the company, its officers, directors or significant shareholders. Thus, audit committees should consider whether the company has implemented processes that identify such prohibited relationships.
  
• Certain Financial Relationships. Audit committees should be aware that certain financial relationships between the company and the independent auditor are prohibited. These include creditor/ debtor relationships, banking, broker-dealer, futures commission merchant accounts, insurance products and interests in investment companies.

Part B.

Locate the proxy statement for a publicly traded company. Search for the disclosures pertaining to the audit committee members. Summarize and discuss your findings.

Answer:-

A proxy statement is a document containing the information the Securities and Exchange Commission (SEC) requires companies to provide to shareholders so shareholders can make informed decisions about matters that will be brought up at an annual or special stockholder meeting.

Issues covered in a proxy statement can include proposals for new additions to the board of directors, information on directors' salaries, information on bonus and options plans for directors, and any declarations made by the company's management and audit committee.

1.The audit committee must provide a separate report in the proxy statement indicating whether it has discussed certain matters with the auditor, including overall audit strategy, matters significant to the financial statements and auditor independence. .

2.The company must also disclose in the proxy statement the audit committee’s pre-approval policies for services from, and the amount of fees paid to, the external auditor.

While Reading Proxy Statement of

The Hotel Du Pont
Weilmington, Delaware

we found following disclosures and finding regarding audit committee.

Report of the Audit Committee

1 .Disclosure regarding complaince of SEC and Sarbanes Oxley Act - For example - The Audit Committee of the Board of Directors is composed solely of independent directors meeting the requirements of applicable SEC and NYSE rules. Each member is financially literate for audit committee purposes under NYSE rules, and the board has concluded that each member qualifies as an audit committee financial expert.

2.Disclosure regarding their Responsibilites and charter - For example - The key responsibilities of the Audit Committee are set forth in its charter, which was approved by the board and is available on the governance section of the UPS investor relations website at www. investors.ups.com. Pursuant to its charter, the Audit Committee’s purposes, duties and responsibilities.

3.Principle Accounting Firm Fees .