June 2003

Books Reviews
Audit Committees: A Guide for Directors, Management, and Consultants, 2d Edition

By Frank M. Burke and Dan M. Guy

Aspen Law & Business; 382 pages; $120; ISBN: 0-7355-3944-0

Reviewed by Alan Reinstein

The authors of this book seek to communicate with the primary audience of audit committee directors, board members, CEOs, CFOs, corporate legal counsel, internal and external auditors, and other consultants to audit committees. They accomplish this through a concise yet complete handbook that all users should find interesting and useful. This guide, which will be updated annually, contains important, emerging information, such as how accountants select among various income measurements; potential financial irregularities; and documents of special interest, such as sample proxy statements and Institute of Internal Auditor (IIA) documents.

First developed more than 60 years ago, audit committees today usually consist of three to five “independent” directors and focus on the audit process for the entire board. Their duties include nominating the independent auditor, reviewing the auditor’s scope, negotiating the audit fee, discussing disagreements between the internal and external auditor and management, discussing major problems relating to the audit, reviewing the audit report and findings, and otherwise overseeing the audit process. The New York Stock Exchange has required its listed firms to use such committees for more than 25 years, and now virtually all publicly traded firms and many nonprofit organizations and other entities use them as well.

The primary issue of audit committees has shifted from whether firms should use them to how best to use them. Chapters 1 through 5 discuss the history and evolution of the audit committee concept, focusing on key milestones such as the 1940 SEC McKesson & Robbins matter and the 1987 Treadway Commission Report. The authors also focus on then–SEC Chairman Arthur Levitt’s urging that effective audit committees meet often, have their own advisors, and ask tough questions of the CPAs and management.

Chapters 6 and 7 discuss how to best create, appoint, and educate audit committees, focusing on charters and other key documents, as well as detailed case studies and examples of independent and nonindependent directors. Chapters 8 through 10 discuss key audit committee responsibilities such as understanding financial statements and overseeing internal controls. The authors do a fine job in discussing the rudiments of financial reporting, so that financial committee members at least know how to get started in reviewing the company’s financial statements. Chapter 18 shows how to minimize the committee members’ general legal liabilities, and Chapter 11 discusses the 1996 Caremark decision, in which a Delaware Court discussed directors’ liability regarding a corporate compliance reporting system, as well as providing many practical tips for directors on how to avoid such adverse circumstances.

Chapters 11 through 15 discuss relationships among audit committee members and their independent and internal auditors and management, including listing the parties’ responsibilities, making suggestions on overseeing this process, and even offering pointers on terminating the external auditors. Chapter 16 discusses self-assessments and other evaluation tools, and Chapter 17 shows how audit committees can operate effectively in the nonprofit sector. Finally, Chapter 19 elaborates on emerging issues such as international operations and environmental legal liabilities. The next edition of the text will surely discuss the Sarbanes-Oxley Act here and elsewhere.

This text is so well documented and informative that both experienced and novice audit committee members should find it worth the time required to master it, or merely use it as a reference book when critical situations arise.

Alan Reinstein, DBA, CPA, is the George R. Husband Professor of Accounting at Wayne State University.

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