New rules, new responsibilities.(audit committees of corporate boards of directors)

The audit committee on the firing line.

Increased legal liability often follows on the heels of increased responsibility. The audit committees of corporate boards of directors have been handed more responsibility--and perhaps greater liability--as a result of rules the SEC, the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers and FASB developed in the waning months of 1999. Although many audit committee members are protected by directors' and officers' liability insurance, (see box), it is important that they understand the new rules and the potential for increased exposure these rules may impose on them. (See "Audit Committee Rules to Improve Disclosure," JofA, Apr.00, page 15.)

In the 1970s, massive financial disclosure problems at companies such as Lockheed and Penn Central created a furor as some blamed financial accounting irregularities on too-familiar relationships between corporate boards and outside auditors. To mitigate the problem, Congress passed the Foreign Corrupt Practices Act of 1977, and securities exchanges adopted rules requiring a corporate board to have an independent audit committee. These changes created a system of checks and balances--the board, the audit committee and the outside auditor. The three were to complement and check one another to ensure the transparency of books and records.

In the ensuing decade, little happened in the way of further regulation. By the 1990s, however, the volume and speed of financial communications put significant pressure on companies and individuals responsible for the content and timing of financial information, as an efficient marketplace responded to news almost instantly. Companies that did not fare well with the required disclosures, including Oxford Health Plans, Cendant, W. R. Grace and Waste Management, …