The risks of being an audit committee member
by Phillip Lev

Once upon a time, a company’s auditors were quietly selected by the CEO and CFO, despite a possible conflict of interest, and then perfunctorily ratified by the audit committee, board and shareholders. Today, we live in an era of heightened corporate governance in which the hiring and management of an auditor is the sole mandate of directors on the audit committee of a company’s board.

This begs the question: what makes a director qualified for such duties?

Every director must act honestly, in good faith and in the best interests of the company. Every director should exercise good business judgment and is responsible to take on only those duties for which he or she feels qualified.

The idea that incorporated entities provide limited liability isn’t absolute. Today’s increased corporate regulations occasionally allow a court to ignore limitations to liability, often referred to as “piercing the corporate veil.”

For the ill-prepared director, the consequences can be severe. If you’re serving in this role, or considering such a role, you need to know the scope of your duties.

As a member, it’s your duty to ensure the audit committee is acting independently, reviewing financial statements and internal controls over financial reporting, and asking questions about the certifications required under the Canadian Securities Administrators’ proposed National Instrument 52-109.

You must also understand the industry the company operates in and be familiar with the company’s operations. You must thoroughly read all information given to you. In general, you should be able to interpret financial statements and think critically about a company’s financial health.

As a director, you’re not a puppet. You should exercise the care, diligence and skill of a prudent, knowledgeable and independent person.

Since directors may have legal liability, you should ensure the company provides insurance coverage for directors before taking on the role. You should also review the company’s corporate governance policy to ensure the board’s role is fully defined.

The best path to avoiding risk is the same clear path that leads to improved corporate governance.

Phillip Lev is an Assurance & Advisory Partner with the Public Company Team. He can be reached at (416) 644-4334 or by e-mail at phillip_lev@mintzca.com.

The Statement is an e-newsletter written by the Public Company Team of Mintz & Partners LLP. Please go to http://www.mintzca.com/index.php?section=pcdirectory to learn more about our Public Company Team The issues raised are for information purposes only. Readers are urged to contact their professional advisors before acting on the basis of the material contained herein.

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