Few Audit Committees Are Implementing Key Practices, According to Report

As audit committees struggle implementing the requirements of Sarbanes-Oxley, fewer than one-third implement a majority of practices that lead to higher ratings of the financial audit process, according to the J.D. Power and Associates 2004 Audit Committee Best Practices Report(SM) released this week.

The report is a comprehensive, independent study of audit performance in the wake of the Sarbanes-Oxley Act of 2002, which established new compliance and procedural requirements for corporate financial accountability of public companies. The report, based on interviews with 1,007 audit committee chairs and 944 chief financial officers, examines audit committee practices and confidence levels in the accounting industry.

"Audit committee chairs are now feeling the weight of increased accountability while experiencing some confusion regarding what compliance exactly looks like," said Ron Conlin, partner at J.D. Power and Associates. "This has translated into a good deal of stress. Audit committees are seeking information that will assist them in strengthening their oversight process and improve committee effectiveness. However, understanding which practices work best continues to be a challenge for audit committees."

The report documents that while audit committees have improved compared to 2003, significant challenges remain.

Several practices being performed by audit committees are directly linked to higher performance ratings of audit firms and increased industry confidence. Examples of best practices include:

  • More frequent meetings between the audit committee and the external auditor improve performance ratings by the audit chair. External auditors who meet with the audit chair seven or more times per year receive the highest ratings. Most audit committees meet five or more times annually with the external auditor. Compared to 2003, audit committees of both small and large companies are meeting more frequently.
  • Excluding management from some meetings also increases ratings with the audit process. The majority of companies that meet four to six times annually frequently exclude management.
  • Audit committee chairs who spend between 16 and 20 hours annually attending audit committee meetings rate the audit experience higher than those spending fewer than 16 hours. Conversely, ratings begin to drop once the number of hours attending audit committee meetings exceeds 20.

"Understanding audit committee practices is essential because the best practices, when applied, result in higher ratings of the audit process, which directly relates to confidence in the accounting industry," said Conlin. "More than 86 percent of respondents who give high ratings to their audit firms also say they are extremely or very confident in the accounting industry. However, only 31 percent of those who give their audit firms low ratings record the same levels of confidence in the industry."

The J.D. Power and Associates Audit Committee Best Practices Report is based on the experiences and opinions of 1,951 audit committee chairs and chief financial officers at SEC-listed companies who were surveyed between July and October 2004. The report can be purchased at www.jdpower.com/auditreport.

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