Page 8 - Complex Litigation

S8 | MONDAY, JUNE 2, 2014 | Complex Litigation
| NYLJ.COM

Expanding Liability for Audit

Committee Members

OCK
GST
BI

BY EUGENE R. LICKER
management, and investigation of alleged relationship with the listed company (either of ensuring the independence of the auditor.

AND AMANDA J. SHERMAN
wrongdoing, the likely liability horizon for directly or as a partner, shareholder or ofi- On the other side of the coin, the audit
Waudit committee members has expanded.
cer of an organization that has a relationship committee works with management—primar-
hen one considers the corporate In large corporations, the audit commit- with the company).” Persons, or members of ily the CFO—with regard to accounting and
bureaucracy designed to ensure good tee has some insulation, both because of their immediate families, who over the pre- inancial reporting. One member of the audit
corporate citizenship, the audit com- the practicalities of policing a large institu- ceding three years have been (a) an execu- committee is designated the “audit commit-
mittee stands out. No committee of the board tion and the plethora of professionals who tive oficer of the corporation, (b) received tee inancial expert,” and companies must
has the broad ranging purview of the audit surround it. Smaller companies, however, compensation (other than directors’ fees disclose whether they have an audit commit-
committee, and those powers and duties present a much greater challenge for the and the like) in excess of $100,000 from the tee inancial expert, and if not, why not. The
have expanded over the years. With great members of the audit committee. While the corporation, (c) served the corporation as audit committee inancial expert must have

power, however, comes great responsibility.
SEC and the exchanges have made clear that a professional, or (d) serves as an executive knowledge of generally accepted accounting
Since March 2010, the U.S. Securities and the expanding role and responsibilities of oficer or employee of a company that does principles and inancial statements and the
Exchange Commission (SEC) has brought the audit committee are not meant to garner more than $1 million of business (or 2 per- application of those principles to account-
four suits against the members of audit expanded liability, as a practical matter, and cent of their gross revenues) with the corpo- ing for estimates, accruals, and reserves;
committees of public corporations, alleg- a legal one, it seems inevitable.
ration are not independent. The NYSE even experience in preparing or auditing inan-
ing that they were not independent and labels as not independent persons who are cial statements or experience supervising
thus allowed others to engage in securities executive oficers of an unrelated company those who have done so; an understanding
and other frauds. In class actions, deriva- The Audit Committee
where one or more of the subject corpora- of inancial reporting and internal inancial
tive suits, and other private civil litigation, In 1939, the New York Stock Exchange, tion’s executive oficers serve on the unre- controls; and an understanding of the func-

naming the members of the audit committee reacting to the SEC’s indings of account- lated company’s compensation committee. tion of the audit committee. Sarbanes Oxley
has become routine, even where the audit ing fraud in connection with McKesson & Clearly, the idea is that these independents Act of 2002, 116 Stat. 745, 790.
committee has taken action to investigate Robbins, suggested that a committee of non- cannot be beholden to corporate manage- The corporation’s internal controls with
and remediate wrongful conduct. As greater management directors select the company’s ment in any respect.
regard to accounting, inancial reporting,
reliance is placed on audit committees, not auditors. Over the years, the SEC, the New The need for independence is evident and operations are also within the purview
only with regard to the inancial statements York Stock Exchange, and the American Insti- when one considers the responsibilities of the audit committee. So too are matters
but also with regard to internal controls, tute of Certiied Public Accountants have reposed in the audit committee. In addi- regarding regulatory compliance, which is
legal compliance policies and programs, risk
announced reinements to the structure and tion to selecting the independent auditor, potentially a huge undertaking. After the

purpose of the audit committee.
the audit committee generally meets with decision in Caremark in 1996, the design,
The attributes of the audit committee are the auditor in advance of the annual audit, maintenance, operation, and implementa-
EUGENE R. LICKER chairs the securities litigation, clear, simple, and meaningful. It is comprised reviews the audit plan, entertains issues that tion of effective programs and policies used
arbitration and regulatory enforcement practice at of “independent” directors. The NYSE listing arise during the course of the audit, and if to detect and, if possible, prevent viola-
Loeb & Loeb in New York. AMANDA J. SHERMAN is an standards state that a director is not inde- necessary terminates the auditor. The audit tions of law have become critical to the
associate in the practice.
pendent unless “the director has no material
committee is charged with the responsibility
exposure of corporate oficers and direc-