State corporate laws set forth best practices and standards of conduct hat apply to members of a corporation’s Board of Directors.
The two primary duties of directors are the duty of loyalty and the duty of care.
furtherance of their own personal interests at the expense of the company.
The federal securities laws may also effectively impose duties on members of a corporation’s Board of Directors. In general, the federal securities laws are designed to require disclosure of information to investors. These laws have not historically been focused on addressing the management responsibilities of a company’s representatives. However,
the SEC has expressed its views that the Board has an affirmative duty to oversee the conduct and performance of management aggressively and ensure that the company’s public statements are candid and complete.
Audit committees help to ensure that the members of the Board of Directors satisfy their duties of care with respect to the adequacy of the company’s financial reporting best practices.
Audit committees also help the Board by overseeing the conduct and performance of management with respect to the preparation of the company’s financial statements and financial disclosures.
Day-to-day responsibilities regarding the company’s financial statements and reporting best practices are generally delegated to the company’s management and finance staff. In addition, the company engages independent auditors as experts to audit the financial statements and review the company’s financial reporting processes and internal controls.
Audit committees generally oversee and monitor the preparation of the company’s financial statements by evaluating information obtained from management, the independent auditors and other sources.
As with corporate governance in general, the audit committee’s role has come under scrutiny in recent years.
In response, both the minimum qualification requirements for audit
committee membership and the required public disclosure about audit committee processes and best practices have increased.
In light of Enron and similar situations, scrutiny of audit committee performance is likely to increase, so it is more important than ever to ensure that audit committees are satisfying at least the basic best practices of conduct.