A New Product for the Corporation Law Market: Audit Committee Certifications

In the swirling corporate governance reforms led by SOX, the SEC, SROs and PCAOB, Delaware and other states are playing minor roles at best. State absence creates a missing arc 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 tasks, including supervising external auditors; SROs require audit committee characteristics like independence and compel disclosure; PCAOB 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 experts in state corporation law such as retired lawyers and judges. Newly-created state agencies so staffed could thus close the newly-forming corporate governance circle. The paper considers this concept. It reviews the increasingly central role audit committees play in corporate governance; considers existing mechanisms available to promote effectiveness of that role?including state corporation law, SRO disclosure rules, and traditional auditing?and notes associated limits of each. It considers PCAOB?s auditing standards requiring auditors to evaluate audit committee effectiveness, showing both the perceived need for such an evaluation and inherent limits on auditor capabilities to render this evaluation effectively. This review points directly to state agencies as possible providers of this evaluation and certification. Outlines for creation and administration of such state agencies are provided. The paper then assesses the odds of this concept being well-received by various constituents, finding likely support among users and producers of financial information as well as from the auditing and legal professions. It expresses doubt as to whether the SEC would support the concept given a new model of corporate-governance production in which the SEC uses various instrumentalities, including SROs and now PCAOB, to generate a functional federalization of corporate governance. Whether states will be receptive depends upon and is evaluated according to rival corporation law production models (races to the top or bottom; interest group; or state versus federal)