Although the Securities and Exchange Commission (SEC) has never in the past brought an enforcement action against an audit committee or a member of an audit committee, recent remarks by SEC Commissioners and staff indicate this may change in the future.
The remarks were made at the annual "SEC Speaks" meeting sponsored by the Practicing Law Institute on February 22, 2002 in Washington DC. SEC Director of Enforcement Stephen Cutler said, "An audit committee or audit committee member can not insulate herself or himself from liability by burying his or her head in the sandâ¦ In every financial reporting matter we investigate, we will look at the audit committee."
Commissioner Issac Hunt added that the SEC is seeking authority to bring failure-to-monitor cases against directors of public companies.
At the same time, the largest U.S. pension fund, California Public Employees' Retirement System (CalPERS), said it plans to work with the SEC and others to "tighten the screws" on corporate audit committees and auditing firms. As part of an action plan to help prevent future Enrons, the CalPERS Board of Administration said the fund will use its influence in corporate boardrooms to oppose:
- Shareholder approval of any auditor who has been retained by a company for more than five years and also performs consulting or internal audit services to the company.
- The election of any director who has served on an audit committee that approved the engagement of an external auditor who also provided consulting or internal audit services to a company.
"Audit committees in the United States right now are very scared," summed Richard Walker, general counsel of Deutsche Bank AG. "Many of their lawyers are counseling them that the best protection is due diligence. That means doing their job, including not taking at face value the earnings and other data auditors and company officials give them."