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Enhancing Policies and Procedures of the Audit Committee

February 01, 2002

By Charles H. Baker and Kristen M. Dunker

In late 1999, the Securities and Exchange Commission and the U.S. stock exchanges adopted new rules and standards to improve disclosure relating to the function of audit committees and to enhance the reliability and credibility of financial statements of public companies. As the problems of Enron and other companies have unfolded in recent weeks, the reliability and credibility of public company financial statements have come into question. While much of the blame has been placed on executives and independent auditors, many have criticized the board of directors, and particularly the audit committee, which is designed to play a critical role in a public company’s financial reporting system by overseeing and monitoring management’s and the independent auditor’s participation in the financial reporting process. The criticism does not lie with the sufficiency of the current rules and standards of the SEC and the U.S. stock exchanges relating to audit committees, but rather with audit committees’ lack of understanding of what their duties are and that these committees should be more aggressive and vigilant in carrying out their duties.