(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

SEC Chief Accountant Examines Critical Role of Audit Committees

"A new day has dawned for audit committees" in the wake of the Sarbanes-Oxley Act, stated SEC Chief Accountant Donald Nicolaisen, as they are now more than ever recognized as representatives of the company's shareholders. Broadly, he said that an important objective for audit committees is strengthening oversight of both the external auditor and management. The chief accountant envisions the relationship between the audit committee, management, and the external auditor evolving to a point where the expectations of the audit committee are well established and where management and the external auditor are particularly responsive to those expectations.

In remarks at the recent American Institute of Certified Public Accountants national conference on securities developments, the chief accountant called on the audit committee to be the external auditor's "biggest fan and harshest taskmaster" in a relationship characterized by open lines of substantive and brutally honest communication. The Sarbanes-Oxley Act demands, he noted, that audit committees engage independent auditors and deal directly with them on significant matters related to the company's financial statements. In this context, he continued, the audit committee should expect auditors to approach their roles with an attitude of " professional skepticism, tempered by experience."

The SEC official sees the relationship between management and the audit committee as equally important. At the broadest level, the ability of the audit committee to assist management in establishing the proper tone at the top is of utmost importance. In addition, audit committees require more information from management in order to fulfill their mandated and fiduciary duties.

For example, he said audit committees need information to help them understand the company's financial results, focusing on material information promoting an understanding of financial condition, liquidity and capital resources, the results of operations and cash flows. This would also include key performance indicators, both financial and non-financial, as well as trends, events, commitments and uncertainties reasonably likely to have a material effect on the company.

This information is supplemented with information from the auditor, including the traditional communications required by the auditing standards and the newer communications required by the Sarbanes-Oxley Act. These additional communication responsibilities include the identification of critical accounting policies, alternative accounting treatments and the auditor's preference among the alternatives, and other material written communications between the auditor and management. In combination, reasoned the chief accountant, this information will assist the audit committee in understanding the company's business so that it can deliver on its responsibilities to investors.

In the view of the chief accountant, the audit committee should also take an active role in ensuring the auditor's independence since loss of independence can have dire consequences for both the auditor and the company. Because of this, he believes that the audit committee needs to understand all aspects of the company's relationship with its auditor. This understanding goes beyond the pre-approval of audit and permitted non-audit services, he emphasized, and would include any contractual arrangements, special fee provisions, unusual expense reimbursement policies, and plans for audit partner rotations.

Finally, noting the complicated issues surrounding the implementation of Sarbanes-Oxley Section 404 rules on reporting requirements with respect to internal controls over financial reporting, which for large companies is June 15, 2004, the chief accountant urged audit committees to have regular meetings with management and their auditors to assess the company's progress in adopting new accounting principles, governance and disclosure requirements, and internal control processes. Companies that decide to wait until it is too late to prepare for these changes will ultimately regret that decision, he predicted.