CHECKING THE NUMBERS
Audit Committees in Spotlight Following Sarbanes-Oxley Reform
By CHRIS CZIBORR
So what’s new for corporate audit committees more than a year after Sarbanes-Oxley accounting reform?
More meetings that last longer, according to a study from Deloitte & Touche LLP.
“There really is a heightened emphasis and more of a spotlight on the audit committee,” said Tom Crane, a member of the executive committee and partner in the corporate practice at Costa Mesa law firm Rutan & Tucker LLP.
“There’s a tremendous need to have qualified board members populate the audit committee, particularly with respect to ensuring the company’s controls and procedures are sufficient,” Crane said.
Among its reforms, the Sarbanes-Oxley Act makes chief executives and directors sign off on a company’s financials,potentially making them liable for corporate fraud.
The reform also requires accounting firms hired to do the books to report directly to the company’s audit committee. The committee, consisting of members of the company’s board of directors, must pick an audit firm and approve what the company pays its accountants.
Those decisions historically were made by management, which gave rise to potential conflicts of interest: Accounting firms hired to do the books were often the same ones tapped as consultants to advise or restructure the company’s business operations.
Meanwhile, a survey done earlier this year by Deloitte & Touche found that audit committees at 39 of the 66 companies that responded are meeting more often and that meetings last longer.
Autobytel Inc.’s audit committee follows Deloitte’s survey results, according to the online marketing company’s chief financial officer, Hoshi Printer.
“We used to have four face-to-face meetings and four earnings release meetings a year,” Printer said. “This year so far we already have met 10 times and will probably end up meeting over a dozen times in total by year-end.”
And Printer said audit meetings that used to be an hour now run “about an hour-and-a-half to two hours.”
The reason: more needs to be approved by the audit committee following Sarbanes-Oxley.
Printer said reform has led to a new sense of heightened attentiveness by audit committees.
“If you need additional work done by the auditor you have to get audit committee approval.
For any acquisitions we have to have some audit committee meetings in preparation,” Printer said.
The meetings are more than just face-time for directors, Rutan’s Crane said.
“Directors are covering themselves, but the heightened awareness is making a very significant difference in attitude that directors are taking toward their appointed task,there’s more seriousness,” Crane said. “It certainly has brought a whole new focus to the chief executive officer and chief financial officer since they now face more liability. They are studying the financials to a finer degree. Whether they are catching more errors, I can’t say.”
More Cautious Committees
Autobytel’s Printer said its audit committee is playing it closer to the vest since Sarbanes-Oxley.
“Our audit committee has always been very active, but since Sarbanes, we are erring on the side of caution,” Printer said. “We are taking extra steps to ensure that we comply fully.”
For many companies, that means filling boards with people that understand their responsibilities.
“The board really wants to know what is going on,it’s not a casual exercise or a matter of window dressing,” said Bob Grant, managing partner of the Costa Mesa office of Deloitte & Touche. “People who sit on multiple boards are spending a lot of time with the audit committees. They have liabilities and a higher degree of responsibility. Things are much more probing.”
It’s not just ethical concerns that are motivating boards.
Directors and officers (D & O;) liability insurance has risen in the wake of recent corporate scandals and the passage of Sarbanes-Oxley.
“Insurers are writing more restrictive terms and charging more money,one client saw their D & O; premiums double,” said Rutan partner Duke Wahlquist. “Premiums usually are going to be negotiable though, depending on the client.”
Charles Ruck, a mergers and acquisitions attorney in the Costa Mesa office of Latham & Watkins, said in a past interview that one of his clients saw its annual directors and officers premium more than triple to $375,000, while coverage had been halved to $5 million. And the deductible has gone up.
“They can’t get as much insurance as they want,” Ruck said.
Terms are stricter. In some cases, Ruck said insurers are attaching quarterly earnings results to the directors’ insurance policies.
If fraud is found in those results, insurance companies could back out from the coverage.
Lowering Insurance Rates
Companies can improve their insurance coverage by filling their boards and audit committees with directors that are independent from the business, said James Lopiccolo, vice president of executive liability & financial products for Irvine-based DLD Insurance Brokers Inc.
“That’s been an underwriting issue for D & O; carriers,” Lopiccolo said. “They want to make sure the audit committee is independent and sufficiently engaged in oversight of the financials and that they’re critically analyzing financial position of the company. The big liability lawsuits that come out are from financial restatements.”
Lopiccolo also said that insurers are introducing new directors and officers insurance policies.
“There are new products for independent directors that are non-rescindable,” Lopiccolo said. “Previously D & O; policies were rescindable: Those policies stated that if the insurer knew about fraud going on at a company they wouldn’t have issued the policy.”
Stock Market Rules
Stock exchanges also have moved to install their own audit committee rules governing public companies listed on their markets.
“For NYSE companies, all audit committee members must be independent, while Nasdaq companies may have one non-independent director on the audit committee,” said Sam Wild, partner in charge of accounting and auditing at Santa Monica accounting firm Stonefield Josephson Inc.
For smaller companies not trading on the NYSE or Nasdaq, audit committee rules aren’t as clear-cut. For small companies that don’t have a separately established audit committee, the board becomes the audit committee.
“In our case D & O; went up, but not by much,” in the wake of the new rules, said Autobytel’s Printer. Autobytel has seven board members, with all but one,Chief Executive Jeffrey Schwartz,independent.
Printer said he was upbeat overall about the effects of Sarbanes-Oxley.
“It will cost us more in time and money,all of us (public companies) will end up spending more time and money,” Printer said. “But eventually it will lead to greater transparency. Once company results become more transparent, investor confidence will come back.”
