Audit Committees: Accountants Needed

From The Accounting Observer

Huron Consulting Group, the forensic accounting firm, has put together an interesting study on the presence of accounting types on the audit committees of publicly-traded firms. “Accounting types” is defined by them as:

“- an “accountant” by training and experience (this category included CPAs, controllers, accounting professors and those who served on accounting standards or other similar boards); or

– a “finance professional,” such as a chief financial officer, treasurer, finance professor.”

Anyone not meeting those criteria was considered to be – a non-accountant. (Poor wretches.) The study’s authors inspected the disclosures of 178 Nasdaq 100 and Fortune 100 firms, covering 700 different audit committee members from 2002 (when the Sarbanes-Oxley Act was passed) through 2005. Given that Sarb-Ox imposed more responsibility on management for producing “cleaner” financial statements, and stiffened the auditing profession at the same time, you might have expected that accounting expertise would be in demand on audit committees. Another impetus: beginning in 2003, the NYSE and the Nasdaq both required audit committees to have at least one member with enough experience to understand accounting issues as they relate to the company they serve.

“More” is exactly what Huron found in its study – but maybe not to the degree you might have expected over the four-year span. Accounting-oriented audit committee members were only 5% of the total in 2002 and their presence more than doubled to 11% in 2005. Other findings: 37% of audit committee experts didn’t seem to have an accounting OR finance background, and 17% of the companies didn’t appear to have an expert with either background.

What to make of the findings? To be honest, it’s surprising at first that there was such a modest increase in the number of accounting types. Not that a doubling in four years is chopped liver; but given the urgency created by SarbOx, you’d have expected a bigger presence. That’s especially puzzling because most of these firms should have had to deal with Section 404 testing a couple years after SarbOx’s passage. Maybe many qualified accounting-type experts saw the handwriting on the wall and wanted to wait until the gut-wrenching phase of Section 404 passed. Now that the worst is out of the way, maybe they’re going to pile onto audit committees. There’s never a shortage of attrition from the ranks of Big Four audit partners.

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