Perhaps it was inevitable after Sarbanes-Oxley, but new research shows that accountants are invading Corporate America’s audit committees.
The number of audit committee members identifying themselves as accountants doubled from 2002 to 2006 and now comprise 12 percent of all the audit committee members out there, according to a recent study by Huron Consulting. Moreover, the number of audit committee chairmen who are accountants has risen dramatically.
Section 407 of SOX requires that companies have at least one “financial expert” on their audit committees (or explain why they don’t have one), and the Securities and Exchange Commission requires companies to disclose who that expert is. The major U.S. stock exchanges also insist that listed companies have audit committees with relevant expertise.
Batten
“Thanks to Enron, SOX, and that environment, people are looking more heavily at the expertise provided by the audit committee,” says Donna Batten, director of the Global Audit Information Network at the Institute of Internal Auditors.
Nowhere does any regulation mandate that the audit committee’s financial expert must be an accountant, or any other particular sort of finance professional—but the regulations do nudge companies in that direction. Under SEC guidelines, for example, financial experts must have (among other things) an understanding of Generally Accepted Accounting Principles and financial statements; experience preparing, auditing or analyzing financial statements; and an understanding of internal controls and procedures for financial reporting.
The New York Stock Exchange and Nasdaq also specify that each audit committee have at least one member with experience in accounting or finance.
Who Are These People?
According to Huron’s study, in 2006 all companies designated one or more audit committee members as financial experts. Of that population, 22 percent had biographies indicating accounting backgrounds. That might include a certified public accounting license or work as an accountant or controller, Huron spokeswoman Jenni Thurlow says.
The number of financial experts categorized as “finance professionals” was 44 percent last year, up from 41 percent in 2005. Such a person could include a chief financial officer or a banking professor, Thurlow says. At least one “accountant” or “finance professional” was reported on 92 percent of audit committee boards in 2006, an increase from 84 percent in 2002, the Huron study found.
Among audit committee chairmen, the number described as having accounting backgrounds increased from less than 10 percent in 2002 to 23 percent in 2006. Based on those results, the study said, “It appears that boards of directors have been increasingly inclined to designate an ‘accountant’ to serve as audit committee chairperson.”
More than half of audit committee members consisted of individuals in the “other” category of professions, which includes managers for a public or private company; a business or economics professor; or a private investor, Thurlow says.
“Thanks to Enron, SOX, and that environment, people are looking more heavily at the expertise provided by the audit committee.”
— Donna Batten,
Director,
Global Audit Information Network
The other notable finding in the Huron study was a sharp increase in the number of meetings held by audit committees: Last year, 60 percent of companies held at least nine meetings; only 7 percent met that often in 2002. And only 3 percent of companies held four or fewer meetings in 2006, down from 44 percent in 2002.
Where the Pressure Is
Audit committees “certainly have been put under more pressure to deal with complex accounting pronouncements and issues facing their companies,” says Maureen Loftus, a managing director at Huron who led the team that conducted the study.
The Huron study also found that the percentage of audit committee members who were employed full time remained constant at about 64 percent from 2002 to 2006; the average size stayed steady as well, at about four members per company. The ages of audit committee members ranged from 33 to 85 years old.
Loftus
The Huron study this year was based on the biographies of more than 670 audit committee members at 164 public companies from the NASDAQ 100 and Fortune 100 listings. That compares with the previous year, when Huron analyzed more than 700 members at 178 companies. Huron attributed the decline in the sample size to mergers and acquisitions among the companies and delays in filings because of stock option investigations. Huron plans to conduct the study again next year to see which trends continue, Loftus says.
Issues to watch out for may include “pressure on boards to find people to fill audit committee seats,” Loftus says. The shortage of accountants has been widely reported, and it’s “hard to say what that will mean in the next generation.”
The IIA encourages companies to consider the overall competencies of an audit committee, in addition to its financial literacy, Batten says. For example, committees need individuals familiar with internal auditing and enterprise risk management practices, as well as those who bring knowledge about particular industries, to serve effectively as stewards for a business.
Committees (and companies) also would benefit from the implementation of education, training, and performance management systems for audit committees, Batten says. The adoption of SOX and other recent regulations brought internal audit into the limelight and under scrutiny; now that’s stabilizing, and “it’s time for fine-tuning,” she says.
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