Corporate Governance

Guidelines For Audit Committees

By Fei-Lu Qian

As reported in the Jim Hamilton?s World of Securities Regulation blog, the UK Financial Reporting Council which has oversight on corporate governance in the UK just released its guidelines to assist audit committees various issues including risk and uncertainties and valuing financial instruments.

The guidelines suggest that companies can gain useful insights ?by observing the strengths and weaknesses of competitors and comparing their performance to that of the company.?  Also, in order to evaluate illiquid asset values, companies should ?consider a wider-than-normal range of reasonable possible outcomes when performing sensitivity and scenario analysis on the cash flow projections supporting both asset valuations and impairment assessment.? In this way, audit committees of companies will be able to clearly understand these judgments and are ?convinced that key judgments are supported by a greater degree of rigor and analysis than in more normal circumstances.?  Due to the current economic condition, there is an overall greater heightened liquidity risk that should require greater attention by companies and their audit committees ?to the key assumptions and processes that lead to cash flow forecasts.?

 As the guidelines are sound and reasonable, audit committees in the United States should read these guidelines and follow suit.

Full post as published by PomTalk on November 25, 2009 (boomark / email).