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- Title
A New Product for the State Corporation Law Market: Audit Committee Certifications.
- Authors
Cunningham, Lawrence A.
- Abstract
In the swirling corporate governance reforms led by the Sarbanes-Oxley Act (SOX), the Securities and Exchange Commission (SEC), so-called self-regulatory organizations (SROs), and the Public Company Accounting Oversight Board (PCAOB), states are playing minor roles at best. State absence leaves missing a potentially critical link in the evolving US. corporate governance circle. The circle is drawn as follows: state corporation law charges boards of directors with managing corporations and authorizes board committees: SOX charges audit committees with certain tasks, including supervising external auditors; the SEC and SROs require audit committee characteristics like independence and compel disclosure; and the PCAOB now requires external auditors to evaluate audit committee effectiveness. This last step could close the circle except that auditors performing this evaluation generate conflicts with state corporation law, conflicts between auditors and audit committees, and face other limitations. These conflicts and limitations can be neutralized in an audit committee evaluation exercise conducted by newly-created state agencies staffed with experts in state corporation law, such as retired lawyers, judges, or academics. These newly-created state agencies could thus square the newly-forming corporate governance circle. This Article presents and evaluates this concept. It reviews the central role audit committees play in corporate governance and considers existing mechanisms that promote committee effectiveness-state fiduciary duties, SEC-SRO disclosure rules, and traditional auditing-noting the limits of each. It considers PCAOB's new auditing standards requiring auditors to evaluate audit committee effectiveness, showing both the perceived need for such an evaluation and the inherent limits on auditor capabilities to render this evaluation effectively. This review leads to state agencies as possible providers of this evaluation and certification. The Article sketches the outlines for creating and running such state agencies. It then assesses the likelihood that this concept would be accepted by various corporate constituents. Likely supporters include users and producers of financial information and the auditing and legal professions. More uncertain is SEC support, given a new model of corporate-governance production in which the SEC uses various instrumentalities, like SROs and PCAOB, to federalize corporate governance. State receptivity depends in part upon and is evaluated according to rival corporation law production models (a race to the top or bottom, interest group, or state versus federal). The Article concludes by lamenting that in the evolving corporate-governance production model, missing links like this one are unlikely to be corrected by state or federal law-unless private-sector agents likely to support such concepts lobby for them.
- Publication
Berkeley Business Law Journal, 2004, Vol 1, Issue 2, p327
- ISSN
1548-7067
- Publication type
Article