Auditors take up new duties

The post-Enron world of corporate governance was apparent at a recent meeting of the six directors on toolmaker Cooper Industries' audit committee.

The meeting took four hours, twice as long as usual, the committee chairman said. Panel members delved into the details of arcane accounting questions, such as the handling of inventory. They initiated studies on hot-button issues such as taxes. And they made it clear that they plan to have more say in the selection of the next internal auditor.

Audit committees, used by boards to scrutinize a corporation's financial reporting, have long been criticized as weak-willed watchdogs. But after a string of corporate-finance scandals, Congress passed an accounting oversight law and stock market officials gave the committees new powers and responsibilities.

The most significant change is that a company's audit committee, not its executives, must hire and fire auditors, a requirement that has affected the balance of power between management and boards, some directors said. Audit committees are supposed to use that new power to ensure that auditors have no conflicts of interest, such as receiving huge consulting fees, that might tempt them to ignore efforts by companies to cook their books.

Taking the reins

Roderick Hills, a former Securities and Exchange Commission chairman who has served on 16 audit committees, said they are quickly exercising their new prerogatives, to the surprise of top financial officers. "When I told the CFO that we would take the first negotiation for the (accountant's) fee, he was really irritated," said Hills, who is audit committee chairman at both Chiquita Brands International Inc. and ICN Pharmaceuticals Inc. He declined to identify which CFO he was discussing.

"It has not been common at those companies for the audit committee to play a significant role in fee negotiations," Hiss said. "It is now."

In addition to hiring auditors and ensuring their independence, audit committees now are required to monitor a company's internal controls against accounting shenanigans. Also, external auditors are now required to give information to audit committees at the same time they present it to management.

The audit panels are also flexing their new muscles to ensure that internal auditors are the kind of people who will work with them to prevent fraud, rather than against them.

Audit committees were first suggested by the SEC in 1976, in response to revelations of widespread bribery of foreign officials by U.S. companies. In 1980, the New York Stock Exchange required its member companies to establish audit committees.

In 1987 a national commission on fraudulent financial reporting said the audit committees would be more effective if they were independent of management and controlled the hiring of external auditors. A 1999 New York Stock Exchange committee made the same recommendation. But those changes were not required until this year.

Wilson says he will talk with a senior partner at Cooper's accounting firm, Ernst & Young LLP, before every audit committee meeting to air any concerns either may have in advance.

"They're just asking more questions, and a lot of those are very, very good questions," Bill Travis, managing partner at accounting firm McGladrey & Pullen LLP, said of audit committees.