The Ins and Outs of Audit Committees in the Post-Enron Era

February 20, 2003


1.1. Scope Of Outline.  To restore confidence in the capital markets in the aftermath of Enron and other major corporate failures, the U.S. Congress and the major stock exchanges have crafted new regulations for the purpose of improving corporate governance, the integrity of financial statements and disclosures, the ethics of Corporate America, the responsibility of executive management for corporate disclosures, the independence and performance standards of auditors and the standards of conduct of lawyers and securities analysts as participants in the capital markets.  The centerpiece of these regulatory reforms is the expansion of the role of audit committees.  This outline focuses on those reforms that most impact the way audit committees operate.  This outline does not address the impact of these reforms on foreign issuers.

New Role Of Legal Counsel For Audit Committees.  The new regulatory scheme imposes a significantly greater responsibility on audit committees.  It comes as no surprise that boards of directors and audit committees are relying upon corporate lawyers for guidance in order to comply with the new regulations.  Drafting committee charters and adopting appropriate operating procedures is definitely the current order of the day for corporate lawyers advising audit committees.  While this represents significant work, it is very likely that after the current start-up period under the new regulatory reforms, audit committees will increasingly turn to legal counsel for advice as they seek to perform their expanded responsibilities.  We can, however, expect audit committees to seek much of this advice from someone other than the company’s in-house counsel or its regular outside corporate law firm.  Independent legal counsel to audit committees will likely become a niche practice for law firms just as “special committee” work has become.

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