Audit Committee Material Weaknesses in Smaller Reporting Companies

Audrey A. Gramling, PhD, CPA, CIA, and Dana R. Hermanson, PhD, and Heather M. Hermanson, PhD

One of the critical elements of internal control over financial reporting is an effectively functioning audit committee. The Sarbanes-Oxley Act of 2002 (SOX) defines an audit committee as “a committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer.” In a December 2000 speech at the Federal Reserve Bank of New York, former SEC Chairman Arthur Levitt described an effective audit committee as “one of the most reliable guardians of the public interest.”