The Audit Committee and Management Fraud

The role of the audit committee has been enhanced in most developed countries. In the US, sections 205, 301, 304, and 407 of the SOX Act of 2002 provide additional rules concerning the prerogatives of audit committees within publicly-traded companies. The audit committee is a fraud detector and ethics policy enforcer for all registered companies.1 Audit committees are required by NYSE (New York Stock exchange), the AMEX (American Stock Exchange), and the NASDAQ. They all require that: (i) audit committee be composed of at least three independent directors2 that is, those outside directors who have no other relationship that might impair their independence, and (ii) be financially literate, and that at least one member (usually the chairman) be a financial expert.