Audit Committee 2662

  • Could there ever be a situation (in your opinion) where the lack of any independent AC members did not result in at least a SD or is this a defacto design failure - regardless of the actual opeation and oversight the AC provides?
    Any and all thoughts are welcome and appreciated.

  • Is the company listed on a national securities exchange in the US? If yes, then all members of the audit committee must be independent based on SEC rules and the rules of the respective stock exchange. The sanction for continued noncompliance with stock exchange rules is a delisting. In addition, there are tough sanctions for violations of securities laws and SEC rules (officer and director bars, civil monetary penalties, etc.) and willing violations carry criminal penalties (imprisonment and monetary fines). Given the significance of the potential sanctions, I would say that wer are usually talking about a material weakness in internal control over financial reporting if it is a listed company. It is a weakness in the design of the control. Even not independent audit committee members can do a good job and actually act independently, but there is a risk that they may not act like that all the time due to conflicts of interest. Have you already checked out PCAOB audit standard no. 5 whether this could be an indicator of a material weakness or of a significant deficiency?
    While an audit committee member may temporarily cease to be independent due to a change in circumstances (marries a family member, his business becomes a major business partner, etc.), he or she will need to step down. Also look at the root cause of the control deficiency. If they do not even find out themselves that they are not independent, it would be a material weakness in my opinion.

  • I should have mentioned in my original post - their stock is not traded on alisted exchange, so I believe they are actually exempt from that requirement. AS 5 indicates that ineffective oversight by the AC is an indicator of a MW, but does not make the link between lack of independence and effectiveness. They are also a small filer, so they have not yet been subject to an of ICFR. Cheers.

  • If the company is not listed on a national securities exchange then the requirement to have an audit committee that consists of independent directors does not apply.
    If the company is a non-accelerated filer, its management already has to assess the effectiveness of internal control over financial reporting (ICFR) and the effectivenss of its disclosure controls and procedures. Only the registered public accountant’s audit of the effectiveness of ICFR does not apply yet.
    Not independent AC members are a risk, but there could be compensating controls. One example of compensating controls to address this risks would be the presence of at least one independent director on the audit committee that is authorized to disclose any problems to the public or the SEC. Another compensating control could be an audit by the external auditor of the actual behavior of the not independent AC members in situations where they have a conflict of interest and a noisy withdrawal in case of problems.

  • All true. In our case the AC consists entirely of members of management and has no ind. members. As ext auditors, we have concluded it is a SD.

  • I agree with your assessment, especially since all AC members are members of management. Will the SD be disclosed in the annual report on form 10-K or 10-KSB? Probably the existing disclosure about the BoD and AC on form 10-K, 10-KSB or the proxy statement already discloses the independence of the AC members or the lack of existence of an AC. An AC is a committee of the BoD so there should be no non-directors in it even if the directors are not independent executive directors.

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