An audit committee’s effectiveness in promoting the independence of the auditing firm supposedly comes from acting as a surrogate for the shareholders. Their effectiveness, in part, is attributed to their outsider status on the board of directors (i.e., they are members who do not hold company management positions). There is increasing concern, however, that the audit committees may not be as effective as initially envisioned: Although they are typically outsiders, they are colleagues and friends of management and have been recommended for their positions on the board of directors by management.

Required:

a. To what extent are audit committees effective in achieving the goals implied in AU Sec. 380, “Communication with Audit Committees”? Review the current articles on audit committee effectiveness to address this question.

b. To what extent are many of the recommended audit committee communications a reflection of the failure of the public accounting profession, as a whole, to act independently in a competitive environment? Explain and support your answer.

c. The Report of the National Commission on Fraudulent Financial Reporting (October 1987) recommends that “all public companies should be required by SEC rule to include in their annual reports to stockholders a letter signed by the chairman of the audit committee describing the committee’s responsibilities and activities during the year.” Do you agree with the recommendation? What would be the primary advantages associated with implementing the recommendation?