Corporate Governance – the Role of the Audit Committee

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Corporate Governance – The Role of the Audit Committee

Deborah L. Lindberg, D.B.A. Associate Professor Department of Accounting Illinois State University

April 2004

Direct all correspondence to: Deborah L. Lindberg, Illinois State University, College of Business, Department of Accounting, Campus Box 5520, Normal, IL, USA 61790-5520; Telephone: (309) 438-7166; Fax: (309) 438-8431; E-mail: The Katie School of Insurance & Financial Services at Illinois State University, whose support is gratefully acknowledged, funded this research. The author is also grateful for work performed by Illinois State University Research Assistants Drew Olson and Yan Zheng.

Corporate Governance – The Role of the Audit Committee
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This paper examines corporate governance concepts that can be discussed with members of an Audit Committee, and provides practical


suggestions on how members of the Audit Committee of an organization can effectively meet their responsibilities. Background The collapse of Enron and the bankruptcy of WorldCom, representing stunning lapses of corporate governance, were compelling forces behind the passage of the Sarbanes-Oxley Act. By stipulating increased reporting requirements and imposing stiff penalties for non-compliance, the Act attempts to increase the accountability of an entity’s Chief Financial Officer, Chief Administrative Officer, its Board of Directors, its Audit Committee, and the external auditors. Exhibit 1 summarizes entities and people who may play a role in corporate governance. [Insert Exhibit 1 about here] In effect, the Sarbanes-Oxley Act is yet another attempt to lessen the “expectations gap” – the difference (gap) between auditors’ beliefs as to their required standards of performance and public expectations of auditors’ performance (ABREMA 2002; Lee 1994). For example, many members of the public believe that auditors in effect “guarantee” the accuracy of financial statements when an unqualified audit opinion is expressed; they contend that auditors should accept prime responsibility for the accuracy of
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