May 23, 2020  
 
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Sarbanes-Oxley for Entrepreneurs

 

The Sarbanes-Oxley Act: Title III—Audit Committees

Written by Bennet Grill for Gaebler Ventures

This article focuses on the first half of Title III of the Sarbanes-Oxley Act. Title III of Sarbanes-Oxley outlines various guidelines for corporate responsibility.

The third title of the Sarbanes-Oxley Act focuses on establishing the guidelines for corporate responsibility.
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The initial measure of this title makes a mandatory establishment of an audit committee for every public company.

The audit committee is "directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm." Requiring such a committee makes it more difficult for individuals who have engaged in fraudulent activities to pass the blame onto others or simply claim that they were unaware of any illegal actions.

Members of the audit committee, who are often members of the company's board of directors, are held personally responsible for the work of the accounting firm that it conducting the audit and are mandated to implement quality controls so that the reporting of the audit is accurate and complete.

After mandating the creation of audit committees, several important criteria are set forth regarding the requirements for membership of such committees.

First of all, any member of the audit committee is strictly prohibited from accepting any fee or compensation from the company for their role as a member. This rule automatically prevents the tactic of bribery to be used to coerce members of the audit committee to alter or compromise the integrity of accounting reports and financial disclosures.

The members of the committee are also not allowed to be directly employed by the company—while they are allowed to serve on the company's board of directors, they cannot be an executive of the company. This statue was put in place to create a more impartial environment surrounding the monitoring of accounting information.

Audit committees are also designated to perform the important task of monitoring and receiving internally generated complaints from employees regarding questionable accounting practices or matters which seem to be unethical.

This role prevents a so-called "whistleblower" effect where a person who reports unethical behavior which reflects badly on the organization is fired or punished because their disclosure hurt the company's financial performance or public image.

The Sarbanes-Oxley act mandates that employees can anonymously submit any and all complaints to the audit committee and be shielded from any harm or repercussions for their honesty. Without this protection, employees of a company engaged in fraud are often too intimidated to come forward with information for fear of negative repercussions on their career.

The audit committees are also given the authority to hire attorneys or other independent counsel regarding the investigation of proper accounting methods— services which the company must pay for. Such rules and regulations create an environment of shared responsibility for accurate and honest accounting standards between the accounting firm and the company being audited.

The Sarbanes-Oxley Series -- Learn More About Sarbox

The Sarbanes-Oxley Act: An Introduction
The Sarbanes-Oxley Act: Title I
The Sarbanes-Oxley Act: Title II
The Sarbanes-Oxley Act: Title III—Audit Committees
The Sarbanes-Oxley Act: Title III—Blackout Periods
The Sarbanes-Oxley Act: Title IV
The Sarbanes-Oxley Act: Title V
The Sarbanes-Oxley Act: Title VI
The Sarbanes-Oxley Act: Title VII—Accounting Firms
The Sarbanes-Oxley Act: Title VII— Past Violators
The Sarbanes-Oxley Act: Title VIII
The Sarbanes-Oxley Act: Title IX-XI

Bennet Grill is a writer who has a passion for business and finance. He is currently an Economics major at Duke University in North Carolina.

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