Life in a Fishbowl

Audit committees have been under intense scrutiny -- and seem to be the better for it.

At the top of the agenda on May 1, when the audit committee of Brunswick Corp. met, were the nonaudit fees paid last year to Arthur Andersen LLP, the company’s external auditor.

The $3.3 million Andersen got for tax advice, acquisition due diligence, and help with new accounting pronouncements, the committee was told, was 2.2 times more than the $1.5 million it cost Brunswick for the basic audit services. But that ratio was about half the average among all of Andersen’s clients. Moreover, the group of five directors, which includes a current and a retired CFO, was assured that these nonaudit fees had in no way impaired the objectivity of the Andersen auditors when they reviewed the books of the Lake Forest, Illinois, maker of recreational products.

To test that assertion, the committee members pressed the finance executives at the meeting about their selection process for these nonaudit assignments. “We probed the staff on whether there was any quid pro quo,” says Robert Ryan, CFO of Medtronic Inc., who joined Brunswick’s audit committee in 1998. “We wanted them to take us through the work that was done, and explain why Andersen was the best firm for the job.”

Ryan was satisfied by what he heard, since the answers were much the same as he would have given under such questioning. As for Brunswick’s CFO, Vicki Reich, she welcomed the scrutiny. “There is heightened sensitivity among all parties that we don’t want to do anything to compromise auditor independence,” she says.

And for good reason. Since February 5, businesses have been required to disclose in their proxies what they pay their accountants for information-technology (IT) and certain other consulting services. And audit committees have, in turn, been called on to determine whether these nonaudit fees can make auditors’ backbones go soft.

Evaluating auditor independence, however, is only the most high profile of a series of new initiatives designed to give audit committees more teeth. The impetus came from former Securities and Exchange Commission chairman Arthur Levitt, who charged–as part of his broad-based assault on earnings management–that audit committees didn’t meet enough, conducted only perfunctory reviews of financial statements, and were stacked with members who were unqualified or too close to management. In response, a blue-ribbon panel of market regulators, accounting officials, and corporate executives sought to rectify those deficiencies with new oversight requirements.

As of June, companies were expected to have addressed the last of the panel’s 10 proposals: that all committee members be financially literate and that at least one qualifies as a financial expert. Former SEC general counsel Harvey Goldschmid asserts that the new rules, which were originally approved in December 1999, “are achieving their purpose of having far more active audit committees.”

By all available measures, Goldschmid is right. Two years ago, CFO reviewed 150 random corporate proxies filed in 1998 to gauge the state of audit committees. We found that Levitt’s critique was largely on target. This spring, we looked at a subset of that original group–only 80 had filed proxies in 2001, while 42 others had either been acquired or gone out of business–and found evidence of improvement.

Discuss

Your email address will not be published. Required fields are marked *