Audit committees

2. The audit process

2.1 Audit overview
2.2 Audit evidence
2.3 Audit risk
2.4 Audit committees
2.5 Information technology
2.6 Assessing internal controls
2.7 Substantive testing
2.8 Materiality and fair presentation
2.9 Audit reporting

Audit committees
Learning objectives
What are the main functions of an audit committee?
Are audit committees truly effective?
In what sense are audit committee members, internal
auditors, and external auditors expected to be
independent?
How does the work of an internal auditor differ from
that of an external auditor?
In addition to the audit committee, what are the
functions of the other board committees?
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Audit committees
Internal
auditors

Audit
committee

Board of
directors

External
auditors

Main functions of an audit committee

Take responsibility for the appointment,
remuneration, and removal of external auditors
Discuss with the auditor the nature and scope of
the audit
Discuss problems arising from internal and
external audits
Act as an buffer between auditors (internal and
external) and management
Review interim and annual financial statements
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Question
In what sense are audit committee members,
internal auditors, and external auditors expected
to be independent?
How does the work of an internal auditor differ
from that of an external auditor?
In addition to the audit committee, what are the
other board committees and what are their
functions?
What are illegal acts? What is an auditors
responsibility to the audit committee if the
auditor discovers illegal acts?
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Presentation
Why are there liability risks if you belong to an
audit committee?
How does liability risk affect an audit
committees decision-making?
What issues are raised when an audit committee
member is a former employee of the companys
audit firm?
Are audit committees generally ineffective?
Presentation Audit committees
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Examples of poor corporate

governance
1. American International Group

2. Waste Management

AIG
On May 1, 2005, AIG announced that it would have to restate
nearly five full years of earnings, reducing shareholders equity
by more than $2.7 billion.
Maurice Greenberg had been CEO since 1967. Greenberg
insisted on being directly involved in all company matters and
kept AIG surrounded in secrecy, giving everyone the impression
that nothing happened in the company without his knowledge.
At board meetings directors often did not ask questions because
they didnt want to appear as if they were challenging
Greenbergs authority. Frank Hoenemeyer, a member of AIGs
Audit Committee, stated he could not recall a time from 1999 to
2003 when AIGs board voted against a proposal made by
Greenberg.
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AIG
Because of Greenbergs control and dominance of the Board,
AIG was consistently rated among the weakest Boards in the
country in terms of corporate governance. The Corporate
Library awarded the Board an F for its board effectiveness
rating, and awarded it a high for its board risk assessment.
Control of AIG by Greenberg was exercised in large part
through his dual control of other entities that should have
been consolidated into AIGs financials (SICO, AV Starr, Union
Excess Re, Richmond Munich Re)
These other entities were used to misstate AIGs financials
E.g., SICO had established a deferred compensation scheme for AIG
executives and the deferred compensation was not included in AIGs
financial statements
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Waste Management
What were the corporate governance
weaknesses at Waste Management that
contributed to the fraud going undetected?

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