When Should an Audit Committee Consider Independent Counsel?

As widely reported and discussed since July 2002, the Sarbanes-Oxley Act of 2002 (the Act) imposes a substantial number of new responsibilities on the audit committee of a public company required to file periodic reports under the Securities Exchange Act. These responsibilities include:

• appointing the company's registered public accountant, determining his or her compensation and overseeing his or her work (including resolution of disagreements between management and the accountant regarding financial reporting);
• approving the receipt of audit and non-audit services from the accountant;
• receiving the accountant's report on critical accounting policies and practices and alternative treatments of financial information discussed with management;
• receiving complaints regarding accounting, internal controls and auditing matters; and
• receiving reports of counsel of evidence of a material violation of securities law or breach of fiduciary duty.

The audit committee is also expected to oversee management's performance of a number of new responsibilities under the Act, including participating in the preparation of, and certifying the accuracy of, periodic reports and establishing, maintaining and assessing the effectiveness of internal controls. Further, at least under the proposed revised Nasdaq listing rules, the audit committee will be required to review and approve related-party transactions.