CORPORATE AUDIT commas m ONTARIO. CANADA: " AN EMPIRICAL STUDY Dissertation for the Degree cf Ph. a. mom»: STATE uwvmsm ‘ W; P. LAM 1974 - ~< a..q -.-~g»n.r~. p31. LIrszY This is to certify that the thesis entitled Corporate Audit Committees in Ontario, Canada An Empirical Study‘ presented by ‘ Wai Ping Lam has been accepted towards fulfillment of the requirements for Ph.D d . Business egree 1n @OL Major professor Date January 25, 1974 0-7639 . ,. _. 412' U‘ P~«',“.T;§f¢3 '3. ‘ "A ABSTRACT CORPORATE AUDIT COMMITTEES IN ONTARIO, CANADA: AN EMPIRICAL STUDY By Mai P. Lam The objective of this study is to obtain a better understanding of the role played by the mandatory corporate audit committee and to determine the extent of its contribution to corporate governance. To accomplish the objective, a questionnaire approach is used to obtain relevant and significant information from corporate chief executive officers, members of corporate audit committees, practicing chartered accountants, and financial analysts. The conclusions, based on the information obtained through questionnaire responses, are as follows: 1. Attitudes toward the mandatory corporate audit committee range from strong opposition and indifference by a few to wholehearted endorsement by the majority of respondents. 2. The mandatory audit committee is generally considered as useful for a variety of corporations. 3. The committee is considered to be a very flexible and adaptive organizational unit in terms of both its purposes and func- tions. Most committees serve a variety of purposes and functions, in addition to those required by the Ontario Business Corporations Act of I v - a g. .2 Wai P. Lam 1971. The two most important purposes are: to relieve the board of directors, as a whole, of details regarding the review of the results of the independent audit, and to serve as an independent review func- tion of the company's operations and its annual financial statements before their submission to the board of directors for approval. Most committees perform effectively the functions that are considered of primary importance: (1) review with the independent auditors, on com— pletion of the audit, their experience, any restrictions on their work, cooperation received, their findings, and their recommendations; (2) review with the independent auditors their evaluation of the com- pany's internal control systems; and (3) review the corporate annual financial statements before their submission to the board of directors for approval. 4. The committee, in establishing a regular and direct channel of communication between independent auditors and directors, can con- tribute and indeed has contributed the following benefits: (1) added assurance to users of financial statements as to the objectivity of corporate financial statements; (2) reinforcement of the independence of the corporation's external auditors; (3) increased attention to the audit and control functions at the director's level; (4) added protec— tion for the directors of the corporation, especially fortfluznonofficer directors, against potential litigation concerning the due care they exercise in the fulfillment of their responsibilities; (5) enhancement of communication and access between external auditors and directors; and (6) provision of discipline value for external auditors, directors, and management. Wai P. Lam 5. The effectiveness of an audit committee apparently is dependent primarily on such factors as the competence of its members and a set of well-established committee objectives. 6. The committee plays an important role in resolving a great number of the major disagreements between the external auditors and the management of corporations. 7. The committee apparently has a positive effect on the reliability of the company's financial statements. However, an inef- fective committee probably would have an adverse effect on the credibility of these statements if such ineffectiveness were known to users of the statements. 8. Management representation on the committee is considered desirable, especially by those who have direct experience with the committee. 9. In general, the committee makes a positive contribution to corporate governance. The recommendations, whose primary objective is to improve the committee's overall usefulness and effectiveness, are as follows: 1. Corporate directors, management, and auditors,lxnflrexternal and internal, should have a clear and full understanding of the commit— tee's purposes and functions. A careful, frank, and extensive discussion by them on what the individual committee should and can do, in light of the environment in which it Operates, will eliminate much of the unnecessary confusion, conflicts, and misunderstanding about the committee that may develop. 2. There should be adequate disclosure both internally and externally regarding the committee's membership and its scope of activity. Wai P. Lam 3. Since the overriding object for establishing the committee is to provide reliable financial information about the company to the investors and the public, it is important that the committee review all financial information released to investors. 4. Since the committee is both useful and beneficial to a variety of parties, including corporate directors, management, external auditors, and users of financial statements, it is strongly recommended that all corporations consider the establishment of such a committee. 5. Legislation or regulations should be enacted to require the disclosure of compliance with this requirement by filing a report with the appropriate government agency and by disclosure in the corporate annual report or in the auditor's report. 6. Consideration should be given to the mundane matter of compensation for committee members. 7. A more important and probably the most difficult matter that deserves consideration is the determination of a proper balance between the social costs and social benefits resulting from the com— mittee._ If the social benefits exceed the social costs, the committee is desirable. Although the full extent of such costs and benefits may be indeterminate due to the inability of quantifying at least some of them, it is certainly desirable that attempts be made to ascertain such a relationship to the greatest extent possible. CORPORATE AUDIT COMMITTEES IN ONTARIO, CANADA: AN EMPIRICAL STUDY By Wai P. Lam A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Accounting and Financial Administration 1974 Cepyright by WAT P. LAM 1974 Dedicated to my wife and our parents. ii ACKNOWLEDGMENTS I wish to express my appreciation to my fellow graduate stu- dents, friends, and faculty members at Michigan State University for their assistance and counsel. I would also like to thank the corporate chief executive officers, members of audit committees, practicing chartered accountants, and financial analysts for their participation in this research endeavor. For the honor of being selected by the Canada Council as a doctoral fellowship recipient, I take this Opportunity to express my deep gratitude. I would like to thank the Canadian Institute of Chartered Accountants for its assistance, particularly Miss Gertrude Mulcahy and Mr. A. K. Mason of the Institute for their invaluable counsel and cooperation. I am also grateful for the generous advice and c00peration of the members of various firms of chartered accountants and my Canadian colleagues, especially Mr. William Brace of Touche, Ross & Co. (Toronto); Mr. Morley Carscallen, Coopers and Lybrand (Toronto); Mr. D. J. MacDonald, Clarkson, Gordon & Co. (London); Professor Ross Johnston, McMaster University; Professor Paul Cormier, Saint Mary's University; and Dr. Micheal Zin, Dean of Faculty of Business Adminis- tration, University of Windsor. . iii To Professor G. M. Jones, Chairman, Department of Accounting and Financial Administration, and Professor George Mead, both of Michigan State University, I express my sincere appreciation for their counsel and encouragement. To my dissertation committee members, Professors Alvin Arens, Stephen Dilley, and Maryellen McSweeney, who provided the essential ingredients for the successful completion of this dissertation, I am especially indebted. Of course, this dissertation could never have been completed without the constant encouragement, understanding, and inspiration of my wife and my two children. To them, I am eternally grateful. iv TABLE OF CONTENTS Page LIST OF TABLES o o o o o o o o o o o o o o o o o Viii LIST OF APPENDICES . . . . . . . . . . . . . . . xi Chapter I. INTRODUCTION . . . . . . . . . . . . . . . 1 Objectives of the Study . . . . . . . . . . 1 Background . . . . . . . . . . . . . 2 Brief Statement on the Development of the Corporate Audit Committee . . . . . . . 2 Legal Requirements for Corporate Audit Committees in Ontario, Canada . . . . . 5 Related Studies . . . . . . . . . . . . . 6 Articles . . . . . . . . . . . . . . . 6 Two Studies . . . . . . . . . . . . . . 8 This Study . . . . . . . . . . . . . . 14 Need and Significance . . . . . . . . . . . 15 Scope and Limitations . . . . . . . . . . . 16 Research Methodology . . . . . . . . . . . 16 Organization of the Study . . . . . . . . . . 17 II. CORPORATE AUDIT COMMITTEES: DEVELOPMENT, ADVANTAGES, AND DISADVANTAGES . . . . . . . . . . . . . 23 Introduction . . . . . . . . . . . . . 23 Definition of the Corporate Audit Committee . . . . 23 Historical Perspective . . . . . . . . . . 25 Rationale for the Recommendation of the Corporate Audit Committee . . . . . . . . 25 Historical Development and Present Status . . . . 27 Advantages and Disadvantages of Corporate Audit Committee . . . . . . . . . . . . . . 33 Advantages . . . . . . . . . . . . . . 33 Disadvantages . . . . . . . . . . . . . 34 Concluding Remarks . . . . . . . . . . . 46 III. RESEARCH METHODOLOGY . . . . . . . . .’ . . . 50 Introduction . . . . . . . . . . . . . . 50 Objective . . . . . . . . . . . . . . - SO Chapter IV. V. The Population . . . . . . . . . . . . Chief Executive Officers . . . . . . . . Audit Committee Members . . . . . . . . Practicing Chartered Accountants . . . . . Financial Analysts . . . . . . . The Pilot Study . . . . . . . . . . . The Final Questionnaires . . . . . . . SOME CHARACTERISTICS AND OPERATING PROCEDURES OF CORPORATE AUDIT COMMITTEES Introduction . . . . . . . . . . . . Size of Corporate Audit Committees . . . . . . Number of Meetings . . . . . . . . . . Scheduling of Meetings . . . . . . . . . Minutes of Meetings . . . . . . . . . . . Composition of Audit Committees and Characteristics of Committee Members . . . The Proportion of Company Officers on Their Own Audit Committees . . . . . . . The Posi_tion of the Company Officers and the Proportion of Chief Executive Officers Who Are on Their Own Audit Committees . . . . . The Principal Occupations of Nonofficer Committee Members . . The Number of Committee Memberships Held by the Individual Members . . . . . . . The Number of Years of Committee Experience of the Members . . . . . . Desirability of Officers Serving on the Audit Committees of Their Companies . . . . . . Disclosing the Names of Audit Committee Members in the Annual Report . . . The Number of Audit Committees Established Prior to the Legal Requirement and Subsequent Changes . . . . . . . . . . . . SUMMARY AND ANALYSIS OF RESULTS OF THE STUDY Introduction . . . Purposes of the Corporate Audit Committee . . . Introduction . . . . Corporate Chief Executive Officers . . Members of Audit Committees . . . . . . . Practicing Chartered Accountants Financial Analysts . . . . . . . . . Combined Ranking by the Four Groups . . . . . Summary . . . . . . . . . . . . . . vi Page 52 54 54 6O 61 61 64 69 69 69 73 76 77 81 84 87 89 90 91 98 99 103 103 103 103 105 105 108 110 110 113 Chapter Functions of the Corporate Audit Committee . . . Introduction . . . . . . . . . . . . Corporate Chief Executive Officers . . . . . Members of Audit Committees . . . . . Practicing Chartered Accountants . . . . . . Financial Analysts . . . . . . . Combined Rankings by the Four Groups . . . . Summary . . . . . . . . . Functions Performed by the Corporate Audit Committee . . . . . . . . . Effectiveness of Functions Performed by the Corporate Audit Committee . . . . . . . . Factors for an Effective Corporate Audit Committee Benefits of an Effective Corporate Audit Committee The Role Played by the Corporate Audit Committee in Resolving Major Di_sagreements between the External Auditor and Management . . . . . General Effectiveness of the Corporate Audit Committee . . Usefulness of the Corporate Audit Committee Effect of the Corporate Audit Committee on Financial Reporting . . . . . . . . . . VI. SUMMARY OF FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS . . . . . Introduction . . . . Summary of Findings . . . . Conclusions . . . . . . . . . . . . . Recommendations . . . . . . . . . . Suggestions for Further Research . . . . APPENDICES . . . . . SELECTED BIBLIOGRAPHY . . . . . . . . . . . . vii Page 120 120 122 122 125 125 128 130 135 139 146 149 159 161 163 165 173 173 173 181 184 187 189 Table 3-1 3-2 3-3 3-4 3-6 3-7 3-9 4-1 4-5 4—6 4-7 4—8 4-9 LIST OF TABLES Selected Ontario Companies by Industry . . . . . Size of Company Based on Sales and Total Assets . . Breakdown of the Responses Concerning Membership Information . . . . . . . . . . . . . . Breakdown of the Responses by Industry . . . Breakdown of Multimemberships . . . . . . . Analysis of the Population of Practicing Chartered Accountants Financial Analysts Classified by Their Functional Specialty . . . . . . . . . . . . Breakdown of the ReSponses to the Initial Questionnaires . . . . . . . . Breakdown of Responses to the Final Questionnaire . Size of Corporate Audit Committees Size of Boards of Directors . . . . . . . . Number of Corporate Audit Committee Meetings Per Year Scheduling of Corporate Audit Committee Meetings . . Minutes of Corporate Audit Committee Meetings Minutes of Corporate Audit Committee Meetings . . Proportion of Company Officers on Their Own Audit Committees . . . . . . . . . . . . . . Present Position of Company Officers Who Serve on Their Own Audit Committees . . . . . . . . Chief Executive Officers Who Serve on Their Own Audit Committees . . . . . . . . . . . viii Page 55 56 57 58 59 61 62 65 67 7O 75 78 79 80 83 85 86 Table 4-10 4-11 4-12 4-13 4-14 5-1 5-2 5-9 5-10 5-11 5—12 Page Principal Occupations of Nonofficer Audit Committee Members 0 O O O I I O O O O O C O O O O 88 Number of Corporation Audit Committee Memberships Held . 89 Number of Years on Corporate Audit Committee . . . . 9O Desirability of Company Officers Serving on Their Own Audit Committees . . . . . . . . . . . . 92 Disclosing the Names of the Corporate Audit Committee Members in the Corporate Annual Report . . . . . . 100 Ranking of Purposes of Corporate Audit Committees — Corporate Chief Executive Officers . . . . . . . 106 Ranking of Purposes of Corporate Audit Committees — Members of Audit Committees . . . . . . . . . 107 Ranking of Purposes of Corporate Audit Committees — Practicing Chartered Accountants . . . . . . . . 109 Ranking of Purposes of Corporate Audit Committees - Financial Analysts . . . . . . . . . . . . 111 Ranking of Purposes of Corporate Audit Committees — All Groups Combined . . . . . . . . . . . . 112 Summary of Individual Group Ranking on Importance of Purposes of Corporate Audit Committees . . . . . 114 Summary of Individual Group Ranking on Importance of Purposes of Corporate Audit Committees and Comparison with Mautz and Neumann Study . . . . . 117 Ranking of Functions of Corporate Audit Committees Corporate Chief Executive Officers . . . . . . . 123 Ranking of Functions of Corporate Audit Committees Members of Audit Committees . . . . . . . . . 124 Ranking of Functions of Corporate Audit Committees — Practicing Chartered Accountants . . . . . . . . 126 Ranking of Functions of Corporate Audit Committees - Financial Analysts . . . . . . . . . . . . 127 Ranking of Functions of Corporate Audit Committees — All Groups Combined . . . . . . . . . . . . 129 ix Table 5-13 5-14 5-15 5-16 5-17 5-18 5-19 5-20 5-21 5-22 5-23 5-24 5-25 5—26 5-27 5-28 Summary of Individual Group Ranking on Importance of Functions of Corporate Audit Committees . . . . Summary of Individual Group Ranking on Importance of Functions of Corporate Audit Committees and Comparison with Mautz and Neumann Study Functions Performed by Corporate Audit Committees - Practicing Chartered Accountants . Effectiveness of Corporate Audit Committee Functions - Corporate Chief Executive Officers Effectiveness of Corporate Audit Committee Functions - Members of Audit Committees . . . . . . . . Effectiveness of Corporate Audit Committee Functions - Practicing Chartered Accountants Effectiveness of Corporate Audit Committee Functions - Summary of Individual Groups . . Effectiveness of Corporate Audit Committee Functions - All Three Groups Combined . . Ranking of the Factors for an Effective Corporate Audit Committee - All Four Groups . . Benefits of an Effective Corporate Audit Committee — Summary of Individual Groups . Benefits of an Effective Corporate Audit Committee — A11 Four Groups Combined Benefits Realized by an Effective Corporate Audit Committee — Practicing Chartered Accountants Major Disagreements Between the External Auditor and the Management . . . . . . . . . . General Effectiveness of Corporate Audit Committees - All Groups . . . . . . . . Usefulness of Corporate Audit Committees to the Four Groups . . . . . . Effect of the Corporate Audit Committee on Corporate Financial Statements — Financial Analysts . . . . Page 131 132 137 140 141 142 144 145 147 150 .152 154 160 162 164 167 LIST OF APPENDICES Appendix A. The Final Questionnaires . . . . . . . B. Letters Sent With First Mailing . . . . . . C. Letter Sent With Second Mailing . . D. Letter Sent With Third Mailing . E. Letters of the Canadian Institute of Chartered Accountants . . . . . . . . . . . F. Letters Requesting Audit Committee Membership Information . . . . . . . . . . G. Purposes of the Audit Committee H. Functions of the Audit Committee . . . . . . 1. Factors for an Effective Corporate Audit Committee J. Benefits of an Effective Corporate Audit Committee xi Page 190 212 217 219 221 226 228 234 244 249 CHAPTER I INTRODUCTION Objectives of the Study Mandatory audit committees for corporations is a relatively recent innovation. The Ontario Business Corporations Act of 1970, which became effective 1 January 1971, is the first legislation in Canada requiring the public corporations under its jurisdiction to establish audit committees. This study will cover these public corporations subject to this legal requirement. The primary objective of this study is to obtain a better understanding of the role played by the mandatory corporate audit committee and to determine the extent of its contribution to corporate governance. More specifically, the objectives are: 1. to ascertain the most important purposes and functions of the mandatory corporate audit committee; 2. to discuss the major characteristics and the actual operations of audit committees, including their size, composition, principal occupation of their members, functions performed, and effectiveness with which these functions are performed; 3. to determine, in general, the usefulness and effective- ness of these committees, as well as the factors essential for effectiveness; and 4. to establish whether an effective committee can contribute the following benefits: a. added assurance to financial statement users as to the objectivity of corporate financial statements; b. reinforcement of the corporation's external auditors' independence; c. increased attention to the audit and control functions at the director's level;3 and d. added protection for the directors of the corporation, especially for the nonofficer directors, in the event of litigation concerning the care, diligence, and skill they exercise in the fulfillment of their proper responsibilities. Background Brief Statement on the Development of the Corporate Audit Committee The concept of a corporate audit committee is not a new one; for example, in the McKesson and Robbins case in 1940, the U.S. Securities and Exchange Commission recommended the establishment of such a committee.4 The concept, however, was virtually ignored by the business and professional communities until the late 1960s. In 1967 there were two significant developments, one in the United States, the other in Canada. The American Institute of Certified Public Accountants (AICPA) and the Ontario Select Committee on Company Law (known as the Lawrence Committee) urged public corporations to form audit committees of their boards of directors. The AICPA recommended that "publicly owned corporations appoint committees composed of outside directors (those who are not officers or employees) to nominate the indpendent auditors of the corporations' financial statements and to discuss the auditors' work with them."5 Similarly, the Lawrence Committee recommended to the Province of Ontario, Canada, that a company with issued equity shares to the public shall be required by law to establish an audit committee of the board of directors, and such a committee shall review and discuss with the independent auditor the company's financial statements and the auditor's report thereon. In November 1968 the Canadian Institute of Chartered Account— ants (CICA) recommended that the requirement for a corporate audit committee be incorporated into both federal and provincial legisla- tion.7 A year later, the Report of the Royal Commission on Atlantic Acceptance Corporation Limited (known as the Hughes Report) concurred with the Lawrence Committee's recommendation and suggested that the closer contact between the directors and the independent auditor could only have beneficial results in the future. In April 1970 the Business Corporations Act, which contained .an audit committee requirement similar to that suggested by the Lawrence Committee, was introduced into the Ontario Provincial Legis— lative Assembly and later became the law for all business corporations incorporated in the province. This mandatory requirement for companies offering securities to the public was the first such legis— lation in Canada. In November 1970 R. K. Mautz and F. L. Neumann concluded in their major study on corporate audit committees in the United States that these committees generally were useful; accordingly, they strongly recommended that companies should consider carefully the desirability of establishing them.9 In April 1971 a further substantial impetus for incorporating the audit committee requirement into Canadian federal legislation emerged. The Proposals for a New Business Corporations Law for Canada, a background paper on the proposals for a new federal corpora- tions act, recommended, among others, an audit committee requirement similar to that suggested by the CICA.10 This paper essentially became the proposed new Business Corporations Act of Canada, which currently is under consideration for passage by Parliament. Interest in corporate audit committees also was growing in the United States. The Securities and Exchange Commission, in March 1972, endorsed the practice of audit committees for publicly held companies.ll Similarly, the New York Stock Exchange strongly recommended, in April 1973, the formation of such a committee by each of its listed companies. More recently, the Province of British Columbia, Canada, also incorporated a provision for audit committees in its new Companies Act, effective 1 October 1973. 'After more than two decades of neglect since the initial recommendation by the Securities and Exchange Commission, the corporate audit committee concept has generated increasing interest and wide— spread support from professional groups and from governmental representatives and legislatures, both in the United States and Canada. In fact, if the proposed Business Corporations Act of Canada becomes law, the majority of the federal companies will be required to have audit committees, in addition to those companies already required to do so by the Ontario and British Columbia acts. Legal Requirements for Corporate Audit Committees in Ontario, Canada Since this study deals with the corporations governed by the audit committee provision of the Ontario Business Corporations Act of 1970, it is essential to set forth the specifics of this provision. Section 182 of the act stipulates: (1) Audit Committee--The directors of a corporation that is offering its securities to the public shall elect annually from among their number a committee to be com— posed of not fewer than three directors, of whom a majority shall not be officers or employees of the cor- poration or an affiliate of the corporation, to hold office until the next annual meeting of the shareholders. (2) Chairman-~The members of the audit committee shall elect a chairman from among their number. (3) Review—~The corporation shall submit the financial state- ment to the audit committee for its review and the financial statement shall thereafter be submitted to the board of directors. (4) Hearing of auditor—~The auditor has the right to appear before and be heard at any meeting of the audit committee and shall appear before the audit committee when required to do so by the committee. (5) Idem-—Upon the request of the auditor, the chairman of the audit committee shall convene a meeting of the com— mittee to consider any matters the auditor believes should be brought to the attention of the directors or share- holders.13 While the act is rather specific about the composition and the maximum functions of the committee, it is silent on its purpose. How- ever, it is reasonable to infer from Section 182 and other related sections that the committee's purpose is to protect the interests of a variety of parties, among them company auditors, directors, and shareholders and the general public. The committee's purposes and functions will be discussed in more detail in chapters 11 and V. Related Studies A search of existing literature has produced relatively little written material on the specific subject of corporate audit committees. Only a few articles and two empirical studies have been written and the following subsections will review these. Articles The articles published in the various professional and business journals and financial newspapers generally proceed from the assumption that the audit committee is useful. The discussion then focuses primarily on the committee's possible advantages and functions. One article, however, discusses its author's experiences with three audit . 14 . . . committees. An overv1ew of these articles is presented below. "Audit Committees of Boards of Directors" (Arthur Young Journal, Summer, 1967) discusses the advantages of audit committees, their organization, and their Operation. It then suggests that audit committees "can be important factors in the successful management of the corporation."15 "Audit Committees: Status and Prospects--Accounting and Auditing Problems" (Journal of Accountancy, May, 1969)16 deals with the advantages of the audit committee, its functions, and the prepa- ration required by both the independent auditors and committee members for the committee meeting. It covers essentially the same materials as in the previous article. "A Look at Audit Committees and the Auditor's Independence," by W. P. Wallace (Canadian Chartered Accountants, July, 1969),17 suggests that one of the audit committee's purposes is the recom- mendation of the selection of the external auditors, and the fulfill- ment of this purpose, among others, would strengthen the independence of the external auditors. "The Effective Corporate Audit Committee," by R. K. Mautz and 18 F. L. Neumann (Harvard Business Review, November—December, 1970), summarizes and highlights the findings of the empirical study conducted by the two authors. Since this study will be discussed in detail in a later subsection, it will not be examined here. "On An Audit Committee and Worried? Here Is What To Do," by D. L. Sinclair and A. G. Fells (The Financial Post, July 17, 1971),19 explains briefly the nature of the audit committee requirements of the Ontario Business Corporations Act of 1970. It also discusses the committee's formation, purpose, composition, scope, powers, and meeting arrangements, and the remuneration of committee members. "The Audit Committee: Its Growing Significance in the Corporate Structure," by Morton B. Solomon (Main LaFrentz & Co., 1972)20 discusses the value and duties of the audit committee. "Experiences with Audit Committees," by W. M. E. McLeod (Canadian Chartered Accountants, February, 1972),21 deals with the author's actual experience with three audit committees and offers suggestions to both the independent auditors and their clients on practical matters concerning committee meetings. "You and the Corporate Audit Committee," by R. K. Mautz (Ernst and Ernst, Winter, 1972-1973),22 provides practical suggestions to both independent auditors and audit committee members regarding the handling of committee meetings and activities. Two Studies There are two empirical studies on corporate audit committees, one by Mautz and Neumann, the other by Auerbach. The former repre— sents the first major and extensive empirical work, while the latter is a sample survey of selected clients of an accounting firm. Both studies deal with voluntary audit committees in the United States. The Mautz and Neumann Study.23--The Mautz and Neumann study was conducted in the late 1960s and published in 1970. Their purpose was to gather together, from such sources as are available, as much information as we could obtain that is relevant to present and potential use of corporate audit committees, to evaluate that information sorting out general tendencies, common practices, exceptional applications, and unusual problems, and to draw such conclusions as are justified by the evidence collected.24 Accordingly, they sought information through library study; through question- naires directed to non-officer directors, corporate chief executives, independent certified public accountants, and internal auditors; and through interviews with members of each of these and other interested groups.25 Their questionnaires covered primarily the following matters: 1. The ranking of purposes and functions of the audit committee; 2. the performance and effectiveness Of these committee functions; 3. the desirable size of the committee; 4. the desirable composition of the committee; 5. the actual composition of the committee; 6. the usefulness of the committee; and 7. the frequency and scheduling of committee meetings. Their interviews covered essentially the following: 1. The role and function of a corporate audit committee, such as the possible expansion or reduction of its role, the way in which its functions can be improved, and fac- tors which may limit the role of such committees; 2. the technical competence of committee members, such as the kind of background that gives one such competence, and any special effort by companies to obtain such com— petence in forming a board of directors; 3. the relationship of a committee to the company's internal audit department; 4. the composition of a committee, such as whether corpo— rate executives are represented and the reasons therefor; 5. the effect of a company's size and nature on its need for a committee; and 6. the Special legal implications in the use of such a com— mittee, such as whether the committee relieves other members Of the board of any responsibility and whether committee members have additional legal responsibility. Based on the data obtained from 42 interviews and 705 usable questionnaire responses (an overall rate of 18 percent, ranging from 8 percent for nonofficer directors to 67 percent for independent certified public accountants), Mautz and Neumann drew seven conclu— sions and offered five recommendations. The conclusions, based primarily on interview data, are: lO (1) Corporate audit committees are not employed as widely as (2) (3) (4) (5) many people appear to believe and, when they are utilized, they have attained significantly varying degrees of suc- cess. In some companies they serve as little more than a formal device for receiving the annual audit report from independent certified public accountants and for recom— mending reappointment of the auditors; in other instances, they constitute a strong force for strengthening internal discipline and provide significant shareholders protection. In practice the corporate audit committee concept becomes a very flexible device both in terms of purpose and func- tion. The most important role of such a committee seems to be that of facilitating direct interchange of ideas, experience, and information between members of the board of directors and the independent auditors. . . . The cor- porate audit committee may also be used as a basis for interchange of ideas and experience between members of the board of directors and these officers and employees within the company who are responsible for internal auditing, accounting, and other financial functions. . . . There appears to be consensus that the size of a corporate audit committee should be about three to five directors. The positions of those members is less clear. The gen- eral feeling is that nonofficer directors should at least be in the majority but representation Of management, some- times only in ex officio capacity, is not without its supporters. The president is the management member most often mentioned to sit on the committee with personnel from the financial area being usually excluded. The compo— sition, like the duties and the normal number of meetings, is largely a function of the nature of the organization and the operating philosophy of the board and management. The effectiveness of any corporate audit committee appears to depend more upon the personalities involved than upon any other variables. The chief executive officer's approach to corporate governance is most important, especially as displayed in his use of committees of the board of direc— tors. Only slightly less important is the attitude of the chief financial officer toward a committee whose activities may impinge upon the duties and prerogatives of his own office. Finally, the competence, energy, and enthusiasm of members of the audit committee itself, and their ability to work with officers and employees of the company without appearing to encroach upon Operating responsibilities, have much to do with defining the scope and effectiveness of audit committee activities. An increasing emphasis at the board of directors level on the contribution of auditing, both internal and independent, to the maintenance of internal corporate discipline is apparent and adds to the current interest in corporate audit committees. 11 (6) Attitudes toward the corporate audit committee idea vary (7) widely, all the way from considerable enthusiasm to what can best be described as indifference. Relatively little direct Opposition was experienced although some expressed fears that the audit committee's potential for inter— ference with otherwise satisfactory relationships is considerable. The potential for usefulness of corporate audit committees, in our judgment, sufficiently exceeds the possibilities for disturbance that we strongly recommend that all com— panies with significant nonmanagement shareholder interests consider carefully the desirability of establishing an audit committee, but that any company do so only after sufficient discussion among those most likely to be involved in its activities to assure that there is sympathy for the idea and that expectations regarding its role and responsi— bility are both reasonable and shared by all.28 The recommendations which focus on the need for and importance of a full understanding of the concept and adequate planning before the adeption of an audit committee by a company are: (l) (2) A frank and intensive discussion of the corporate audit committee concept in a full meeting of the board of direc— tors in which all present are urged to express their support for or oppposition to the idea. . . . The attitudes of the chief executive officer and the chief financial officer are particularly important. Some attempt to out— line, at least in broad terms, the duties which such a committee will be assigned is important in this discussion so that any possible infringement on the duties of the chief financial officer or others will be understood. Attention should also be given to the matter of competence on the part of available board members to discharge the projected duties of an audit committee. . . . Reasons for a completely nonofficer committee or for management repre— sentation should be examined. If the board is favourable to the establishment of a corporate audit committee, an ad hoc committee to hold a series of preliminary meetings is desirable. The members of the committee (possibly those members of the board most likely to serve on the audit committee) should meet to express their views of the committee's responsibilities and duties and, if possible, to draft statements of these. Having done this, an informal meeting with the company's independent accountants is very desirable. . . . Another meeting to discuss possible audit committee activities involving internal auditing and accounting with appropriate company personnel and with any operating department heads who might be affected should also be held. 12 (3) Upon completion of these meetings, the ad hoc committee should draft a proposed statement of purpose and duties for the consideration and possible approval of the board of directors, taking into account the results of its several meetings. Adequate time to review this in a full board meeting is desirable. (4) If the board of directors is still favorably inclined toward the establishment of a corporate audit committee, a resolution to that effect is now in order. The extent to which the resolution should include specification of the committee's duties depends largely on the formality of the particular board's Operations. In any case, a clear understanding of these duties on the part of directors, officers, and employees concerned is most important. The more sensitive various officers are to implications of the committee's establishment, the more carefully should the committee's duties be specified. (5) Upon authorization and appointment, the committee should meet to establish its own operating procedures including the number, timing, and duration of meetings, the nature of its agenda, and the responsibilities of its chairman and other members. No limitation should be placed on the number of meetings with the auditors and either party should be able to initiate them.29 The Auerbach Study.30-—The results of the Auerbach study, published in the Financial Executive in September 1973, were based on the responses from 68 of the 100 sampled clients of a major accounting firm in the United States.31 The study's major findings are presented below. 1. The number of clients with audit committees has increased from 17 percent in 1967 to 68 percent in 1972. Such committees are nearly twice as common in the largest surveyed clients as in the smallest clients. 2. The suggestion of the independent auditors, management, and outside directors is cited as the most common reason for estab- 33 lishing an audit committee. 13 3. The size of audit committee ranges from two to more than six members, with three-member committee as the most common. 4. The majority of committee members are nonofficer direc- 35 tors. 5. In addition to the primary function of reviewing the scope and results of the audit, many committees perform functions such as the evaluation of the company's financial officers, internal auditors, and the staffing of the accounting and financial depart- ments. 6. About half of the committees meet with independent auditors to discuss the scope and results of the annual audit, the auditors' "management letter," and recent AICPA, SEC, and other regulatory agency pronouncements and their impact on the , . . 37 company s f1nanc1a1 statements. 7. Some committee functions are not performed effectively: ”For example, 18 percent found the review of alternative accounting policies in meeting with the financial officers ineffective (54 percent did not respond), and 15 percent found previews of the audit with the I a c ['38 CPA Ineffective (15 percent d1d not respond). This study recommended that every company that has not yet established an audit committee should consider its use. In the short run, it can give the board of directors a stronger grasp of each year's audit and annual report; in the long run, it gives stockholders addi- tional protection and greater conf§gence in the reliability of financial reporting in general. 14 This Study The present study deals with the mandatory corporate audit committees in Ontario, Canada. It employs the questionnaire approach to obtain relevant and significant information on audit committees from corporate executive officers, members of audit committees, practicing chartered accountants, and financial analysts. In addition to the fact that this study deals with mandatory corporate audit committees, it differs from the previous two studies, particularly the Mautz and Neumann study, in two other major aspects: (1) the respondents and (2) the information solicited. Since one of the most important objectives of the audit com— mittee is to enhance the objectivity of company's financial statements for the benefit of the financial statement users, this study seeks financial analysts' opinion on the subject. Also, it includes all audit committee members rather than only nonofficer members as in the Mautz and Neumann study. Certain significant information not available in the previous studies is sought by this study, namely: (1) the effect of an audit committee on the reliability and credibility of the company's financial statements; (2) the major benefits of an effective audit committee and the extent of their realization by companies with such committees; (3) the factors contributing to an effective committee; (4) the desirability of disclosing the names of committee members in the annual report; (5) the role played by the committee in resolving major disagreements between the auditor and management; and (6) the disposition of committee minutes. 15 Need and Significance Corporate directors, officers, and business related profes- sionals are being held to increasingly high standards of accountability for the affairs of the corporations with which they are associated. Since the corporate audit committee concept has been suggested as offering significant assistance to a number of groups in meeting their business responsibilities, empirical research into the use of such committees could be of great significance. Interest in these committees has been growing in the past few years, especially in Canada, where such a committee is mandatory for companies in both Ontario and British Columbia. If the proposed new Business Corpora— tions Act of Canada becomes law, the majority of federally incorporated companies also will be required to have an audit committee. However, despite this interest and the apparent potential usefulness of the concept, little empirical work exists. The study by Mautz and Neumann is the first and only such major effort, and they were concerned with voluntary, not mandatory, audit committees. The present study is the first empirical study on mandatory corporate audit committees in Canada. Consequently, it will provide relevant and significant empirical data on the operations and experiences specifically related to the mandatory application of the concept. This study will offer useful empirical data for the Canadian federal government and those provinces that are considering the enactment of corporate audit committee requirements or are seeking to improve the requirements already in effect. It also will provide pertinent information for those corporations contemplating the l6 establishment of audit committees either at their discretion or as required by law. Finally, the study will add to and update the present limited literature in the field. Scope and Limitations This study concerns only those corporations covered by the audit committee provision in the Ontario Business Corporations Act of 1970. The provision became effective 1 January 1971, and corporations responding to this survey have had a minimum of two years' experience with audit committees. Although some corporations may have had committees prior to 1 January, and thus could provide more valuable insights, such corporations are more likely the exception rather than the rule . In particular, this study will deal primarily with the func— tions of audit committees having a direct relationship to the corporation's external audit. The reason for such a restriction is that the legal requirement for audit committees is intended for the external audit. Any other functions which these committees may deem appropriate to perform will be considered as outside the scope of this research, although they may be discussed. ResearghmMethodology This study employed a questionnaire approach to obtain as much relevant and significant information as possible from those who have had direct experience with audit committees and those who, by virtue of their profession, could be expected to have such 17 experience and interest. Using this direct experience or profes— sional interest criterion, four groups of individuals were selected: corporate chief executive officers; members of corporate audit committees; practicing chartered accountants (CAs); and financial analysts. These latter were included because, aside from their professional interest, they are, to a certain degree, representa- tives of the investors. A separate questionnaire was designed for each of these four groups. Although many of the same questions appeared on each, there were entries relevant to a specific group. For example, the question on the effectiveness with which certain functions were carried out was directed to the groups having direct experience, such as committee members and practicing CAs, and the questions on the effect of the committee on the credibility of financial statements were directed to a more objective group, the financial analysts. To ensure that the questions were as free from ambiguity and misinterpretation as possible, the questionnaires were pilot tested by administering them to a sample of each of the four groups. Appro— priate changes were made as a result of the pilot test, and the questionnaires then were used for the final survey. Organization of the Study Chapter I introduces the objective of this study, provides some background information on corporate audit committees, offers a review of related studies, and presents a brief statement about the study. Justification for and limitations of the study are dis- cussed. Finally, the research methodology is indicated. 18 Chapter II first discusses the definition of the corporate audit committee and then presents its historical develOpment and -present status, both in the United States and Canada. Finally, the advantages and disadvantages of the committee are discussed. Chapter III first discusses the objective of the mail ques— tionnaires used in this study and the kind of information solicited. Second, it discusses the population in general and the establishment of the populations for corporate chief executive officers, members of audit committees, practicing chartered accountants, and financial analysts. Third, it summarizes the details of the pilot study. Finally, it shows the details of administering the final questionnaires. Chapter IV presents some characteristics and Operating pro- cedures of the audit committees. First, the size of the committees, the number of meetings, and the scheduling and minutes of meetings are discussed. Second, the composition of committees and charac— teristics of their members are analyzed. Third, the issue of officers serving on the audit committees of their own corporations is discussed. Finally, attention is focused on the desirability of disclosing committee membership information and on the committees established prior to the Ontario requirement. Chapter V summarizes and analyzes the results of questionnaire responses that have not been covered by Chapter IV. First, it dis- cusses the ranking of purposes and functions of the audit committee and the performance and effectiveness of such committe functions. Second, it focuses on the factors contributing to, and benefits of, an effective committee, on the major disagreements between the 19 external auditor and management, and on the role played by the com- mittee in such disagreements. Finally, it discusses the general effectiveness and usefulness of the committee and the effect of the committee on corporate financial reporting. Chapter VI first presents a summary of findings, highlighting the research findings discussed in Chapters IV and V. Second, it draws conclusions based on the research data presented throughout the study. Third, it presents recommendations, whose primary objective is to improve the committee's overall usefulness and effectiveness. Finall it rovides su estions for further research. Y: P 10. ll. 12. l3. l4. FOOTNOTES-~CHAPTER I AICPA Executive Committee, "Statement on Audit Committees of Boards of Directors," Journal of Accountancy (September,l967): 10. R. K. Mautz and F. L. Neumann, Corporate Audit Committees (Urbana: Bureau of Economic and Business Research, University of Illinois, 1970), p. 46. Ibid. U.S. Securities and Exchange Commission, "In the Matter of McKesson and Robbins, Inc.-—Summary of findings and conclusions," Accounting Series Release, 1-112 (Washington, D.C.: U.S. Government Printing Office), p. 20. AICPA Executive Committee, "Statement on Audit Committees." Ontario, Legislative Assembly, 1967 Interim Report of the Select Committee on Company Law (Toronto: 1967), p. 92. Canadian Institute of Chartered Accountants, "Special Committee on Shareholders' Audit," Canadian Chartered Accountants (November, 1968): 354. Ontario, Royal Commission, Report of the Royal Commission—— Atlantic Acceptance Corporation Limited (Toronto, 1969), III, 1653. Mautz and Neumann, Corporate Audit Committees, p. 96. Robert W. V. Dickerson et al., Proposals for a New Business Corporations Law for Canada (Ottawa: Queen's Printer, 1971), II, 107. U.S. Securities and Exchange Commission, "Accounting Series Release No. 123," Journal of Accountancy (May,1972): 15—16. Haskins & Sells, The Week in Review (Detroit: 27 April 1973), p. 1. Also see the Wall Street Journal, 15 June 1973. The Business Corporations Act, 1970, Ontario (Toronto: Richard Debos, 1970), p. 107. W. M. E. McLeod, "Experiences with Audit Committees," Canadian Chartered Accountant (February,1972): 74-75. 20 15. 16. l7. 18. '19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 21 Ernest L. Hicks et al., "Audit Committees of Boards of Directors,’ The Arthur Young Journal (Summer, 1967): 34-35. W. David Anderson and Joe R. Fritzemeyer, "Audit Committees: Status and Prospects," The Journal of Accountancy (May, 1969): 72-76. W. P. Wallace, "A Look at Audit Committees and the Auditor's Independence," Canadian Chartered Accountants (July, 1969): 17—19. R. K. Mautz and F. L. Neumann, "The Effective Corporate Audit Committees," Harvard Business Review (November—December, 1970): 57—65. D. L. Sinclair and A. G. Fells, "On An Audit Committee and Worried? Here's What to Do," The Financial Post (July 17, 1971). Morton B. Solomon, "The Audit Committee: Its Growing Signifi— cance in the Corporate Structure," Viewpoint (Main Lafrentz & Co., l972——first edition): 17-19. Also see The CPA Journal (July, 1972): 578-580. W. M. E. McLeod, "Experience with Audit Committees," pp. 74-75. R. K. Mautz, "You and the Corporate Audit Committee," Ernst and Ernest (Winter, 1972—1973): 15-20. Mautz and Neumann, Corporate Audit Committees. 1111;, 11. 11:11. _1gig;, 21-28. lbid;, 29—30. ggggj, 94-96. jbgg;, 96-97. Norman E. Auerbach, "Audit Committees-—New Corporate Institution,’ Financial Executive (September, 1973): 96-104. Ibid;, 96. Ibid., 97. Ibid; Ibidé) 97—98. 35. 36. 37. 38. 39. 22 11331;, 98. 1131.911. 112$, 104. 11331;, 98. Ibid., 104. CHAPTER II CORPORATE AUDIT COMMITTEES: DEVELOPMENT, ADVANTAGES, AND DISADVANTAGES Introduction This chapter presents a more detailed discussion of the development of the corporate audit committee and its advantages and disadvantages. First, the definition of the corporate audit committtee is discussed. Second, an historical perspective is presented, with specific focus on the rationale for recommending such a committee, its historical development, and its present status, both in the United States and Canada. Third, the possible advantages and disad- vantages of a corporate audit committee are discussed. Definition of the Corporate Audit Committee Typically, definitions or descriptions of the corporate audit committee tend to focus on the committee's Specific composition and functions. The following are examples. [The] committee [is] to be selected from non-officer members of the board of directors which shall make all company or management nominations of auditors and shall be char ed with the duty of arranging the details of the engagement. Committees [shall be] composed of outside directors (those who are not officers or employees) to nominate the inde— pendent auditors of the corporations' financial statements and to discuss the auditors' work with them.2 An audit committee of the board of directors . . . [shall be] composed of not less than three directors, of whom a majority shall not be officers of the company or any affiliate of the 23 24 company . . . [to review and discuss] . . . not only the finan- cial statements and his [the auditor's] report thereon, but relevant matters arising therefrom or from his audit generally. The directors of a corporation . . . shall elect annually from among their numberzacommittee to be known as the audit committee to be composed of not fewer than three directors, of whom a majority shall not be officers or employees of the corporation or an affiliate of the corporation . . . The corporation shall submit the financial statement to the audit committee for its review. . . .4 The term "corporate audit committee” [includes] any committee established at the general Officer or board of directors level which has a specific charge to supervise or review the work of the independent or internal auditors. Three essential elements emerge from these examples. The com- mittee is (l) drawn from boards of directors who are (2) primarily or entirely outside or nonofficer directors, and (3) it is concerned with audit matters and related financial statements. In addition, certain important implications are apparent. (l) The committee is chosen from the highest level of the corporate structure. (2) It is independent of management because the majority of members are nonofficer directors. (3) Its chief function is to review audit matters and related financial statements. (4) It repre— sents a direct tie between the independent auditors and the board. Accordingly, a more complete and descriptive definition of a corporate audit committee would be the following: A corporate audit committee is a committee of the board of directors, composed chiefly of nonofficer directors who are independent of management, which has a specific charge to deal with the corporation's audit matters, including its financial reports and especially those related to the external or independent audit. 25 The main advantage of this definition is that it emphasizes the essen— tial characteristics of the committee without dwelling on the details of its composition and its functions. Historical Perspective Rationale for the Recommendation of the Corporate Audit Committee The most salient rationale for the recommendation of a corpo— rate audit committee is the need to assure the independence of the corporation's external auditor. Proponents of the corporate audit committee believe that such an assurance can best be achieved by providing a direct channel of communication between the auditor and the directors through the audit committee. They also believe that this assurance, in turn, will enhance public confidence in corporate financial reporting. The following discussions will focus on this matter of assuring the auditor's independence. Independence of the auditor generally is classified into two categories: independence in fact and independence in appearance. The former refers to the auditor's ability to maintain an unbiased and impartial mental attitude in all aspects of his work, regardless of whether or not existing circumstance might have an apparent effect on his independence. The latter refers to the auditor's freedom from conflict of interest, that is, it implies "absence of influence or control in the matter of the auditor's conduct, action, and opinion." It is perhaps "the most important single determinant of the need for the audit function.”7 It is the auditor's independence in appearance that is the subject of discussion here. 26 The auditor always is assumed to be independent of management, although this assumption is questionable at times. It has been sug— gested that a corporate audit committee, composed chiefly or entirely of outside directors, can assure this independence. For example, the Securities and Exchange Commission, in recommending audit committees in 1940, stated that such a committee, together with other recommenda- tions, would ensure the required degree of independence of the auditor necessary for the protection of investors.8 The Lawrence Committee gave a similar reason for its recommendation. It is generally agreed that one of the most serious threats to the independence of the auditor is the close relationship which frequently (and naturally) develops between management and the auditor. . . . As a practical matter, whether or not he [the auditor] is re—appointed to his office is a manage- ment decision and not that Of the shareholders. "Management” in this context sometimes means the president and/or the chief financial officer of the company. In carrying out his role, the auditor not infrequently can feel under pressure to follow the dictates of such officers. To avert this threat to the auditor's independence, the Committee recom- mends that . . . there shall be an audit committee of the board of directors.9 The Report of the Royal Commission on the Atlantic case fre- quently noted that the auditor would have been more independent of management and the sorry story would have been different had there been an audit committee. W. A. Farlinger, who served eighteen and one—half months as a trustee for Atlantic, drew a similar conclusion. It would seem that if Atlantic had had such a committee the committee would have realized that the [senior] auditors upon whom they and the public were depending were clearly working under an impossible situation imposed upon them by the president of the company. . . . any inquiry by the senior auditors or an audit committee as to the independence of the [subsidiaries] auditors would have revealed the conflict of interest in their roles as managers bookkeepers, auditors, if not their identity as borrowers.i 27 Mautz and Neumann considered that the added indpendence con— tributed by the audit committee is most useful. "An audit committee which holds CPAs directly accountable to the board of directors strengthens their independence of management. Such a contribution is . "11 one of the most useful ones the committee can make. More recently, the New York Stock Exchange, in recommending that each of its listed companies form an audit committee, stated that "all available evidence indicates that properly constituted corporate audit committees com- posed of outside directors, contribute significantly to the independence . . "12 of the out31de auditor. In short, the major reason for recommending the establishment of the corporate audit committee is to assure the independence of the auditor. Historical Development and Present Status United States.—-The concept of having a corporate audit com- mittee is a relatively recent develOpment, and the U.S. Securities and Exchange Commission is probably the first significant organization to suggest it. In 1940, as a result of the McKesson and Robbins case, the commission recommended the establishment of such a com- . 13 . . . _ mittee. The concept, however, received little attention from either the business or professional communities in the more than two decades that followed. An editorial in the Journal of Accountancy in 1953 offered two explanations for the seeming lack of interest. "In our Opinion, it is simply because the matter has received rela- tively little publicity recently, and has been overshadowed by 28 14 . . . . other, newer problems." This indifference is borne out by the results of the Mautz and Neumann study. They reported in 1970 that only 121 of the 385 corporations included in the study had audit committees; of these 121 companies, only 39 had had such committees for more than 20 years. However, the concept began to receive a renewed and greater interest in the mid- and late 19603. In July 1967 the AICPA Executive Committee issued a statement "Audit Committees of Boards of Directors." It recommended that publicly owned corporations appoint committees of outside directors (those who are not officers or employees) to nominate the independent auditors of the corporations' financial statements and to discuss the . . . 15 . . . . auditors work With them. Spec1f1cally, audit committees should do the following. 1. Discuss with the auditors the sc0pe of their examination, with particular attention to areas where either the com- mittee or the accountants believe special attention should be directed. The audit committee would be authorized to have the auditors perform such supplemental reviews or audits as it deemed desirable. 2. After the audit, review the financial statements and the auditors' report thereon with the auditors and determine that they have received all the information and explana— tions they requested. 3. Invite the auditors' recommegdations regarding internal controls and other matters. The Executive Committee further suggested that "the auditors should communicate with the audit committee whenever any significant question having a material bearing on the company's financial state— ments has not been satisfactorily resolved at the management level." Apparently, the AICPA recommendation did influence some companies to establish audit committees. Mautz and Neumann indicated that 47, or 9 l7 29 about 40 percent, of the 121 companies formed their committees in the late 19605. In November 1970 Mautz and Neumann concluded in their study of U.S. corporations that the potential for usefulness of corporate audit committees . . . sufficiently exceeds the possibilities for disturbance that we strongly recommend that all companies with signifi— cant nonmanagement shareholder interests consider carefully the desirability of establishing an audit committee. In MarchJINHZthe U.S. Securities and Exchange Commission issued its Accounting Series Release No. 123, "Standing Audit Committees Composed of Outside Directors,’ and it endorsed "the establishment by all publicly—held companies of audit committees composed of outside directors."19 In April 1973 the New York Stock Exchange, in its draft white paper, "Comments on Financial Reporting to Shareholders and Related I Matters,‘ stated that it "strongly recommends formation by each listed 2 company of a Corporate Audit Committee.” 0 Canada.--In 1967 the audit committee requirement, along with other recommendations of the Select Committee on Company Law, was incorporated into a bill to amend the Ontario Corporations Act. The committee, chaired by Allan F. Lawrence, was appointed by the Legis- lative Assembly of Ontario in June 1965 to "inquire into and review The Corporations Act of the Province of Ontario and related acts and regulations."21 The ensuing two-year inquiry and deliberation included queries to all corporations in Ontario and interested seg— ments of the public, as well as the review of written briefs submitted 30 by various organizations and of company laws in England, California, and New York. Specifically, the committee recommended that in the case ofaacompany that has issued equity shares . . . to the public . . . there shall be an audit committee of the board of directors . . . [and] that the financial statements of the company, together with the auditor's report thereon . . . be first submitted to the audit committee for the review and comments of such committee . . . the committee shall be composed of not less than three directors, of whom a majority shall not be officers of the company or any affiliate of the company. “ It was hoped that the recommendation would "make available to the auditor a means whereby he may discuss with a committee of the direc~ tors not only the financial statements thereon, but relevant matters arising therefrom or from his audit generally."23 In November 1968 the Canadian Institute of Chartered Account- ants (CICA), through its Special Committee on Shareholders' Audit, recommended the incorporation of the following audit committee requirements into both provincial and federal legislation: 1. Legislation, both federal and provincial, should require that the directors of a company that has distributed securities to the public shall appoint from among their number a committee known as the l'audit committee'I to be composed of not fewer than three directors, of whom a majority shall not be officers or employees of the com- pany or of an affiliate of the company. 2. Legislation, both federal and provincial, should require that the financial statements and draft auditor's report thereon shall be submitted to the audit committee for its review prior to such statements and report being presented to the board of directors for approval. 3. Legislation should: (a) require that the Shareholders' auditor appear before any meeting of the audit committe of the board of directors if such attendance is requested. (b) give the auditor the right on request to appear before any meeting of the audit committee and to be given an opportunity to be heard. (c) give the auditor the right to cause a meeting of the audit committee to be called to consider any matters 31 discovered in the course of his examination which he believes should be brought to the attention of the board of directors or the shareholders. In September 1969 the Report of the Royal Commission on the Atlantic Acceptance Corporation Limited recommended, among others, the establishment of audit committees for public corporations. The Royal Commission, with the Honourable Mr. Justice S. H. S. Hughes as commissioner, was appointed in August 1965, under the Public Inquiries Act, to investigate the cause and effect of the Atlantic failure. The investigation took four years to complete, and a four—volume report told the story; it concluded with numerous recommendations for changes in legislation. In relating the significance of this case to the accounting profession, the commission said: "It may be said that the Atlantic failure was as much of a watershed in the history of accounting in Canada, and perhaps abroad as was that of McKesson & Robbins Inc. in the United States."25 The Commission report, which concurred with the details and rationale of the Lawrence Com- mittee's recommendation on corporate audit committees, noted that the sorry story of Atlantig_would have been different had there been an audit committee. In April 1970 the Business Corporations Act of 1970, which incorporated many of the recommendations of the Lawrence Committee, was introduced into the Ontario Provincial Legislative Assembly. This act received Royal Assent on June 1970 and became effective 1 January 1971. It applies to all business corporations incorporated in the Province of Ontario. Among the major changes embodied in this act is the require- ment that public corporations establish audit committees, the first 32 such legislation in Canada. The recommendations by the Lawrence Committee, the CICA, and the Hughes Royal Commission, and perhaps more important the effects of the Atlantic affair itself, no doubt had contributed significantly to the successful enactment of the audit committee requirement. Section 182 of the act, as stated in Chapter I, contains essentially the samelxxudrementsas those recommended by the CICA, with one exception: The present legislation does not Specif— ically require the audit committee to review the auditor's report on the financial statements. However, in practice such a review probably will be done. In April 1971 a further substantial impetus for incorporating the audit committee requirement into Canadian federal legislation emerged. The Proposals for a New Business Corporations Law for Canada, a background paper on the proposals for a new federal corpo— rations act, recommended, among others, an audit committee requirement similar to that suggested by the CICA.26 The Proposals is the product of a lengthy research conducted by a group of lawyers under the directorship of Robert W. V. Dickerson, a lawyer and a chartered accountant. It was published in two volumes. Volume 1 is the commentary and Volume 2 is the Draft Canada Business Corporations Act of Canada. The second volume has become essentially the new Business Corporations Act of Canada, currently under consideration for passage by Parliament. More recently, the new Companies Act of the Province of British Columbia, Canada, effective 1 October 1973, also contains an audit committee requirement. 33 Concluding remarks.--In summary, the corporate audit com— mittee concept, after a long period of neglect, has aroused, within a few years, increasing interest and support from professional groups, government representatives, and government legislatures, both in the United States and Canada. While audit committees are voluntary in the United States, they have become mandatory for at least two Canadian provinces. If the prOposed Business Corporations Act of Canada, with the audit committee provision, becomes law, mandatory audit committees will be required for the majority of federal companies in addition to the majority of companies in the Provinces of Ontario and British Columbia. In fact, the audit committee perhaps has become one of the most significant new corporate developments in Canada. Advantages and Disadvantages of Corporate Audit Committee The creation of an audit committee introduces a new organiza- tional unit into the corporation's structure. This new unit has its objectives and functions, and it also gives rise to a new set of relationships among the auditor, directors, and management. As a result, literature on the subject has suggested that it has certain advantages and disadvantages. This study will attempt to provide some empirical data to substantiate these contentions. Advantages l. Enhances communication between auditor and directors. 2. Enhances credibility and objectivity of financial reporting. 34 3. Reinforces auditor's independence.29 4. Provides protection for directors.3 5. Provides discipline value. Disadvantages 1. Possible conflicts and misunderstanding.31 2. Danger of false appearance or overexpectation from added credibility of financial reporting. The following subsections will discuss these advantages and disadvantages. Enhances communication between auditor and directors.-—The establishment of an audit committee in the corporation creates a more direct and explicit channel of communication between the external auditor and the members of the committee and through them to the full board. With this committee, both the auditor and members have direct and regular access to each other to discuss matters of mutual concern and interest. Such direct communication can be beneficial to both the auditor and directors, as noted in a Journal of Accountancy editorial: Certified public accountants generally agree that the full values of the services they render as independent auditors are derived most often by those companies in which the audi- tors have direct access to the board. Whether that access is best arranged through an audit committee or by appearance of the auditor at board meetings depends on the size of the board, the size of its agenda, and other circumstances. But there seems to be no doubt that a direct channel of communi— cation between the board and the auditors is very much to the advantage of all concerned.32 Presumably, this direct channel of communication between the board and the auditor is used frequently. This is not true. Mautz and Neumann describe what is done in practice. 35 Our interviews indicated that any extensive exchange between a company's independent CPAs and its board of directors is far from common. Certainly the independent CPAs always have access to the board of directors if necessary, and most of the CPAs we talked to had ready illustrations of situations in which they felt it necessary to take questions to the board of directors. At the same time, it is clear that such is not a normal occurrence but rather is considered to be extraordinary. [Emphasis added.] The independent CPA would be reluctant to go to the board of directors over the head of operating management. . . . His feeling is that such an action is like appealing to a court of last resort. An audit committee provides an opportunity for contacts between the auditor and directors on a normal and regular rather than extraordinary basis.34 Moreover, because of the very nature and pur- pose of the committee, there is likely to be more time for discussions with the members and certainly less chance for management to discourage discussing issues with these directors. More important, when the committee is composed of mostly outside directors, as it should be, issues brought up by the auditor can be settled with greater objec— tivity. Consequently, such a committee tends to encourage communication between the auditor and its members. Accordingly, the real value of an audit committee lies not only in the enhancement of communication between the auditor and the board members, but also in the objectivity that it brings. Enhances credibility_and objectivity of financial reports.—— The board of directors is responsible for providing investors with accurate, complete, and reliable financial reports. As directors, they are in a position to make a careful and thorough review to ensure that the reports are indeed accurate, complete, and reliable. Such a review best can be accomplished by discussing with the auditor 36 all significant matters relating to the audit and the financial reports. However, the board tends to devote its time to other more complex and pressing issues than such seemingly routine matters as the annual audit and its financial reports. Moreover, the size of the board is often too large to make such an in—depth discussion with the auditor feasible. It has been suggested that an audit committee of the board would help the board to discharge its responsibilities on the audit and report matters without distracting its attention from more or equally important issues. Indeed, the audit committee, with its smaller size and specific charge to deal with audit and financial reporting matters, can devote the necessary time and attention to these issues and pursue its review in a more inquisitive and discerning manner. In addition, the committee, which usually is composed primarily of outside directors, is independent of management and thus can be objective in its review of audit and financial matters. Consequently, it is rather fair to state that such an independent and objective review mechanism can indeed enhance the credibility and objectivity of corporate financial reporting. In fact, both the AICPA and the SEC agree that the committee can give such added assurance and thus afford the greatest possible protection to investors. Reinforces auditor's independence.-—The external auditor is the representative of shareholders. He must act in their best interest and must be independent of management. However, it is not uncommon that a close relationship often develops between the auditor and management. This relationship raises the question of 37 the auditor's independence, that is, his effective independence from management, especially in view of the auditor's increasing reliance on management to discuss and resolve issues rather than taking them directly to the board. To reinforce his independence, it is suggested that the auditor should have a direct channel of communication to the board through an audit committee. Such a committee strengthens the audi— tor's position in his relationship with management and provides a forum independent of management before which the auditor may discuss matters he considers significant. Management probably will be more objective and less dominating in its dealings with the auditor if the auditor, as a normal and regular procedure, will bring the issues discussed to the attention of the committee and keep its members informed. The possibility that management may pressure the auditor to follow its dictates also is minimized. More specifically, an audit committee can help to reinforce the auditor's independence in two major areas: (1) appointment and dismissal of the auditor and (2) the auditor's work, such as the scope and results of his audit. FirstJ let us examine the appointment and dismissal of the auditor. In theory, at least, the auditor is appointed, and can be dismissed, by shareholders. In practice, his appointment and dis- missal is often a management decision, and the ratification by shareholders is a formality. This frequently puts the auditor under pressure to follow the dictates of management if he wants to be appointed or reappointed. Thus, it is prOposed that to emphasize the 38 auditor's independence his appointment should be made by an audit committee of outside directors and approved by the shareholders. "The best hope of establishing the . . . [auditor] as a completely independent Operation probably is to ally his interest with those of ”37 outside directors. The Committee on Basic Audit Concepts of the American Accounting Association agrees that this type of appointment arrangement "may strengthen the auditor's position of independence and does provide additional assurance to users that the auditor is . "38 not subserv1ent to the preparer [management]. Also, the audit committee may serve as a deterrent for any unreasonable dismissal of the auditor by management. Mautz and Neumann explain how the committee can help. If the corporate audit committee demands of the operating man— agement its reasons for severing relations with its auditor and gives the auditor an Opportunity to present his case, it may add a great deal to the effective independence of the outside auditor. The mere existence of such a committee, particularly one that has developed close relationships with the auditor, would in itself provide a useful deterrent to any possible hasty action on the part of management.39 Regulatory agencies and legislatures also have sought measures to protect the auditor from unfair dismissal by management. For example, the SEC requires companies to report to it any changes of auditors together with the existence of any disagreements with auditors and the disclosure of disagreements that were resolved. The Ontario Business Corporations Act gives the auditor the right to inform the shareholders, in writing and/or by appearance before the shareholders meeting, at the company's expense, of the reasons for his nonreappoint— ment. Such a measure probably discourages willful dismissal by management. 39 It is important to note the difference the effect of the audit committee and the regulatory or legislative measure may have on the appointment and especially the dismissal of the auditor. The former provides a forum for settling these issues before they materialize, while the latter is more likely to provide explanations after the fact. However, both, in varying degrees, reinforce the auditor's independence. Second, let us consider the auditor's work. The audit com- mittee generally has as its function the review, with the auditors, of the scope and results of the audit as well as the kind of cooperation he has received from management in the course of his work. Such a review encourages management to provide full cooperation during the process. The auditor, on the other hand, probably will be less likely to be intimidated by any possible restriction on the scope of his audit imposed by management. Moreover, the existence of the audit committee allows the auditor "to discuss problems raised by the accounts with directors" and frees him from his "previous depend— ence upon management and the internal accounting officers of the company for discussion of these problems."40 Thus, the committee can resolve policy differences between management and the auditor and precludes management's temptation to change auditors in the hope that the replacement will accept its policies. Accordingly, such a committee tends to reinforce the auditor's independence. Provides protection for directors.--An audit committee, smaller in size than the full board and more specific in its func- tions, can devote sufficient time and attention to its review of 40 financial reporting matters. At the same time, it presents an Opportunity that was not previously available for committee members who are outside directors to be more knowledgeable about corporate financial affairs and to be able to make a reasonable investigation of them. If the members take their duties seriously and perform them diligently, the committee can be very effective and thus provide protection for directors, particularly the committee members, against potential litigation concerning the due care they exercise in ful- filling their responsibilities. The directors can show, as evidenced by the committee's activities, that they have exercised the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. In the Bar Chris case, both outside and Officer directors were held liable to the investors because they did not exercise "due diligence" or perform "reasonable investigation" concerning the correctness and completeness of the prospectus. The judge felt less certain that the fifth officer—director knew of the errors in the prospectus, however, to escape liability this director was required to prove that he had exercised "due diligence" to make sure that the statement . . . was accurate and complete. He could not prove that, and so he, too, was liable. It was on this question of due diligence that the four-outside directors also floundered. None knew they were signing a flawed statement, but none had made the "reasonable investigation" of its accuracy demanded by the securities laws . . . The judge made it clear that what constituted a reasonable investigation could vary from one director to another . . . The court, in considering the case, saw a "reasonable investigation" as simply one that "a prudent man would employ in the man— agement of his own property."4 If there had been an audit committee, one would imagine that the directors, particularly the committee members, would have been able 41 to show evidence of "due diligence" and "reasonable investigation." Perhaps such a committee could have made the occurrence of this unfortunate event more difficult and less likely. However, if such events occur despite the committee's diligence and reasonable inves- tigation, it is uncertain what degree of protection other board members can derive from the committee. Apparently, these board members can argue that they may rely on their colleagues to discharge the assigned duties prOperly. This argument would not be a very strong one unless the directors demonstrate that they had no reason not to rely upon their colleagues. Presumably the best way to demonstrate this is for them to have scrutinized the committee's activities to ensure its competence and effectiveness. It would seem fair to expect that the board would make such a scrutiny one of its normal functions. Since it is doubtful that all audit committees are as effective as they should be, there is a question as to the degree of protection, if any, that directors can derive from a committee which merely goes through the motions. It has been suggested that there is some protection. Some lawyers believe that directors can still satisfy the requirements of the law without too much effort; all that is required is that directors go through the motion of investigation. One lawyer adds that the quality of the probing doesn't matter too much. It's enough if the direc— tors ask questions. They don't have to be the right questions. Others believe that if the board simply goes through the motions of investigating it could be more damaging than helpful. In any event, few responsible directors would employ such a tactic as a possible defense against potential litigation concerning the due care with which they have discharged their responsibilities. 42 Provides discipline value.--An audit committee with tOp—level and independent organizational status can provide discipline value' for the auditor and management. Realizing that financial statements and related subjects are to be reviewed by the committee, both the auditor and management are more likely to be alert. The fact that their activities are subject to the committee's scrutiny and discus— sion probably will motivate them to try a little harder, to be more organized, and be more objective in resolving issues. By the same token, the committee is required to report its activities to the full board and is subject to the board's scrutiny. Therefore, the disci— pline factor applies to the committee itself as well. As a result, there is a greater likelihood of a better performance by all. Possible conflicts and misunderstandings.—-The corporate audit committee is a recent develOpment. Consequently, there is no great body of literature or experience, particularly that describing the specific duties of such a committee. Companies with audit committees often find it difficult to determine what the committee's duties should be. It is not uncommon to find that many committees do not have well-defined objectives and functions, or that objectives and functions are too general to be of practical value. Thus, com— mittee members who perceive their duties differently and pursue them more vigorously may encroach upon management duties. As a result, conflicts and misunderstanding frequently develop. The consequences of such problems may range from the presence of a continuing source of irritation and deteriorating morale for those who must deal 43 with the committee to serious undermining of the effective func- tioning of the committee. Conflicts between the committee and management may arise from potential or actual infringement by the former upon the Opera— tional responsibilities of the latter. The mere establishment of the committee, especially one without fairly specific duties, sometimes may be construed by management as potential infringement. Actual infringement, of course, is caused by the actions of the committee members. It is not unusual for those members who take their duties seriously to intrude. In a few cases, some members even may use the committee for improper purposes. A member, in one instance, used the confidential information obtained through the committee to the detri— ment of other officers.['3 Misunderstanding among the committee members, the auditor, and members of management may occur because of the nature of the committee's activities and its composition. In addition to misunder— standing caused by the absence of specificity of the committee's activity, as noted earlier, another source of misunderstanding stems from the auditor's direct communication with the committee. Such communication involves discussions on accounting, internal control, financial reporting, and other related areas which may have some bearing on the quality of management's performance in these areas. If there is no management representation on the committee, management naturally is concerned, not only about what matters are discussed, but also about how they are discussed. Information relating to management's performance may be erroneous, biased, or 44 contrary to the facts as management perceives them. Management may believe that it is exposed to criticism without an adequate and timely opportunity to present its rebuttal. When such an Opportunity is made available, it usually is at a later date. Biased or distorted views may have preconditioned the minds of the committee members to such a degree that subsequent rebuttals are less effective. As far as management is concerned, the damage is done. On the other hand, management representation may inhibit a direct and frank discussion of these matters. Consequently, the com- mittee will not derive the full value from direct communication with the auditor. Similarly, the committee faces the same dilemma when it dis- cusses management personnel matters with the auditor. If management representatives and/or the officers are present when they are being evaluated, candid and objective discussion may be inhibited. On the other hand, the absence of representation may create misunderstanding. One possible solution to this dilemma is to provide the opportunity for the party involved to respond immediately. However, this may not be practical and may become very unwieldy when a relatively large number of personnel or subjects are involved. A more practical solution to minimize possible conflicts would be to make the committee's objectives and duties more specific and to consult the significant parties who are likely to be affected by the committee's activities, namely, senior members of management and financial and accounting officers. Minutes should be maintained for all meetings by the committee, and copies of these should be 45 distributed to members of the board, the chief executive officer, the auditor, and senior members of management if matters discussed fall under their jurisdiction. Also, the auditor should endeavor to consult and thorougly discuss with management the important matters that will be brought to the committee's attention. This step not only allays management's suspicion about the issues to be discussed but also provides the auditor an Opportunity to ensure that he has not misinterpreted the situation and has obtained full information in reaching his conclusions. Thus, management feels it is not being by—passed and has more confi- dence that matters will not be misrepresented. Finally, the committee should allow members of management a timely Opportunity to present their side of the story whenever the situation calls for it. Danger of false appearance or overexpectation of enhanced credibility of finapcial reporting.——One advantage of the corporate audit committee is that it enhances the credibility of corporate financial reporting. However, this advantage applies to those corpo— rate financial statements where the audit committees are effective. When the committee is ineffective, the credibility of corporate financial reporting is not enhanced. Since financial statement users do not have practical means for determining which committees are effective, they may be expected to presume, in the absence of contrary evidence, that all committees are effective. Consequently, corpora- tions with ineffective committees give a false appearance of the enhanced credibility of their financial reporting. 46 Overexpectation occurs if a financial statement user expects that credibility has been enhanced and this actually is not the case. Presently there is little knowledge about the degree of enhancement the user expects. Regulatory agency recommendations and legislative requirements concerning these committees tend to heighten the user's expectation of the value that such a committee can contribute. This can be dangerous, particularly when there is little knowledge of what the committee actually does and how effective it is. In View of the danger of giving a false appearance and of overexpectation of enhanced credibility of financial reporting, there is a need for full disclosure of the committee's objectives, activities, and achievement to financial statement users. Such a disclosure would enable the user to evaluate the effectiveness of the committee and, in turn, the degree of enhancement it gives to the credibility of financial reporting. Concluding_Remarks On balance, the advantages of a corporate audit committee appear to outweigh the disadvantages. Moreover, the two disadvantages discussed earlier can be overcome by a careful, frank, and extensive consultation by corporate directors, management, and both internal and external auditors on the specific purposes and functions of the audit commitee as well as by an adequate disclosure of the committee's activities on the part of management to both internal and external parties. 10. ll. 12. 13. 14. 15. 16. FOOTNOTES--CHAPTER II U.S. Securities and Exchange Commission, "In the Matter of McKesson and Robbins." AICPA Executive Committee, "Statement on Audit Committees of Boards of Directors." Ontario, Legislative Assembly, 1967 Interim Report of the Select Committee on Company Law (Toronto, 1967), p. 92. The Business Corporations Act, 1970, Ontario (Toronto: Richard Deboo, 1970), p. 107. Mautz and Neumann, Corporate Audit Committees, p. 12. American Accounting Association, Committee on Basic Auditing Concept, 1969-1971, The Accounting Review, Supplement to Vol. 47, 1972, p. 31. Ibid. U.S. Securities and Exchange Commission, "In the Matter of McKesson and Robbins." 1967 Interim Report, pp. 91-92. W. A. Farlinger, "Atlantic Acceptance: Calamity or Catalyst," Accountancy (January, 1972): 16. Also see "Atlantic Acceptance, Calamity or Catalyst?" Canadian Chartered Accountant (May, 1971): 343. R. K. Mautz and F. L. Neumann, "The Effective Corporate Audit Committee," Harvard Business Review (November-December, 1970): 61. Haskins and Sells, The Week in Review, 27 April 1973, p. l. U.S. Securities and Exchange Commission, "In the Matter of McKesson and Robbins." "Relations of Auditors and Directors," Journal of Accountancy (December, 1953): 680. AICPA, 10c. cit. Ibid. 47 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 48 Ibid. Mautz and Neumann, Cogporate Audit Committees, p. 96. U.S. Securities and Exchange Commission, Accounting Series Release No. 123, Journal of Accountancy (May, 1972): 15. Haskins and Sells. 1967 Interim Report, p. l. 2218;) p. 92. Canadian Institute of Chartered Accountants, Special Committee on Shareholders' Audit, Canadian Chartered Accountant (November, 1968): 354. Ontario, Report of the Royal Commission, Atlantic Acceptance Corporation Limited (Toronto, 1969), III, 1357. Dickerson et al., Prgposals for a New Business Corporations Law, p. 107. Morton B. Solomon, "The Audit Committee: Its Growing Significance in the Corporate Structure," 18. AICPA, loc. cit. Ontario, Legislative Assembly, 1967 Interim Repgrt of the Select Committee on Company Law (Toronto, 1967): 92. Also see Mautz and Neumann, Corporate Audit Committees, 46; Morton B. Solomon, loc. cit., 18; etc. Mautz and Neumann, loc. cit., 46. 1239;; 69-74. "Relations Of Auditors and Directors," p. 81. Mautz and Neumann, op. cit., p. 51, emphasis added. Morton B. Solomon, loc. cit., l8; Mautz and Neumann, laa;_£a£;) 51. AICPA, loc. cit.; U.S. Securities and Exchange Commission, Accounting Series Release No. 123, loc. cit. Finance Commentary, ”Why Accountants Need to Tell a Fuller Story,' Business Week, 6 February 1971, p. 87. 38. 39. 40. 41. 42. 43. 49 American Accounting Association, op. cit., p. 32. Mautz and Neumann, op. cit., p. 54. Ontario, Report of the Royal Commission, p. 1652. "What the Bar Chris Directors Did (not enough)," Fortune, 15 May 1969, p. 151. Ibid. Mautz and Neumann, p. 73. CHAPTER III RESEARCH METHODOLOGY Introduction This study employs the questionnaire approach to solicit as much significant and relevant information on corporate audit committees as possible from those individuals likely to have an intimate knowledge of and direct experience with such committees. This chapter first discusses the objective of the mail questionnaires and the kind of information solicited. Second, it discusses the pOpulation in general and the establishment of the populations for corporate chief executive officers, members of audit committees, practicing chartered accountants, and financial analysts. Third, it summarizes the details of the pilot study. Finally, it shows the administering procedures and the breakdown of responses of the final questionnaires. Objective The objective of the mail questionnaires was to solicit information on corporate audit committees from the most knowledgeable and experienced persons. Accordingly, four groups were selected: (1) corporate chief executive officers; (2) members of the audit com- mittees; (3) practicing chartered accountants; and (4) financial analysts. Each group received a separate questionnaire, which contained many common questions as well as questions relevant only to the 50 51 specific group. The following information (common to all the ques- tionnaires) was sought: 1. What are the purposes of corporate audit committees, and how important are they? 2. What are the functions of the committee, and what is the degree of their importance? 3. How useful are such committees to a corporation? 4. Generally how effectively do the committees fulfill their responsibilities? 5. How desirable is management representation on them? 6. What factors make an effective committee, and how should such factors be ranked? 7. What are the major benefits of an effective committee? 8. How desirable is it to disclose the names of committee members in the annual report? 9. What other information, not included in the question— naire, is significant? Additional information was solicited from the three groups likely to have direct and intimate involvement with audit committees --chief executive officers, practicing chartered accountants, and audit committee members. These groups were asked: (1) What are the actual functions performed by the committees, and how effectively are they performed? (2) Have there been any major disagreements between the external auditors and management? If so, were these disagree- ments resolved by the committee? (3) What is the average number of meetings per year? Finally, both chief executive officers and audit committee members were asked whether committee meetings were scheduled regularly. 52 Other information relating to the specific characteristics of each individual group and its particular interest in the committee was solicited. Essentially, the chief executive officers were asked whether there was a committee established prior to the legal require- ment. If so, they were asked whether there had been significant changes since committees became mandatory. They were also asked whether they were members of their own or other companies' committees. Committee members were questioned about such matters as the number of years they had served, number of memberships on other audit committees, their position with the company or their principal occu- pation, and whether minutes for committee meetings were kept. The practicing chartered accountants were asked how many of their clients had audit committees and how many of these benefited from them. Three questions were directed to the financial analysts, two of which were related to the effect of the audit committee on corporate financial statements and one of which related to their membership on such committees. Since one of the objectives of the audit committee was to enhance the objectivity of corporate financial statements for the protection of investors, it appeared apprOpriate to obtain financial analysts' opinions on that subject. The final questionnaires are provided in Appendix A. The Popul at ion At its inception, this study attempted to cover all companies subject to the audit committee provision of the Ontario Business Corpo— rations Act, that is, all business companies incorporated in Ontario 53 that were offering securities to the public either through a listing on an Ontario stock exchange or by filing a prospectus with the Ontario Securities Commission. Accordingly, officials of the Toronto Stock Exchange and the Ontario Securities Commission were contacted to explore the feasibility of identifying such a population. Even though the commission was empowered to enforce the audit committee requirement, neither it nor the exchange maintained a separate record for the companies governed by this requirement. The commission did not require companies to disclose the existence of such a committee in the reports submitted to it. Since the commission had a record of each individual company incorporated in Ontario, one alternative was to conduct a very extensive and time— consuming search through individual corporate records. After locating all companies incorporated in Ontario, it would have to be determined whether their securities were listed in the exchange or whether their prospectuses had been filed with the commission. However, the cost of such a search was prohibitive due to the fee levied on the examina— tion of each record and the large number of companies involved. A more feasible alternative, which would yield a smaller but nevertheless satisfactory pOpulation for the study, was to identify companies through the "Survey of Industries-—l972" published by the Financial Post. To ensure that the companies selected were subject to the audit committee requirement, only those incorporated in Ontario and with securities listed on the Toronto Stock Exchange were included in the population; 178 companies thus were selected. They covered more than 18 industries and their sizes in terms of total 54 sales and total assets ranged from very'small.($36,000 and $1,244,000) to very large ($2,558,752,000 and $1,022,479,000). Tables 3-1 and 3-2 Show the details of these characteristics. In view of the relatively small number of companies selected for this study, it was decided to send questionnaires to the chief executive officers and audit committee members of all 178 companies. The following subsections will discuss the process of identifying the four populations included in the study, namely, the chief executive officers, the members of the committees, the practicing chartered accountants, and the financial analysts. Chief Executive Officers The task of identifying chief exeutive officers of the 178 companies was relatively simple since many companies provided this information in the "Survey of Industries—-l972." For those which did not, presidents were deemed to be the chief executive Officers. The justification was that the president generally was the operating head of the company and that most of the chief executive officers specified in the "Survey of Industries" were presidents. The validity of this justification subsequently was confirmed by the responses to the questionnaires. Audit Committee Members The Ontario Business Corporations Act requires that audit committee members must be company directors. While the "Survey of Industries—-1972" provided a listing of all directors and company officers, it did not show which were committe members. Examination 55 TABLE 3-1 SELECTED ONTARIO COMPANIES BY INDUSTRY a Number of Industry Companies 1. Textile 4 2. Beverage 3 3. Foodstuff and allied products 10 4. Iron and steel 16 5. Nonferrous metals 3 6. Electrical equipment 8 7. Merchandising 25 8. Construction 8 9. Pulp, paper, and lumber 5 10. Printing, publishing, and broadcasting ll 11. Transportation and storage 3 12. Oils and pipelines l 13. Chemicals 9 14. Property develOpment 33 15. Management and holding l8 16. General manufacturing 15 17. Recreation and entertainment 3 18. Miscellaneous ___3 Total llfi. 8Based on the "Survey of Industries--l972," The Financial Post. 56 TABLE 3-2 SIZE OF COMPANY BASED ON SALES AND TOTAL ASSETS Op zuuwaoum mHmOHBwSU mmcflawdflo cam mHHo mwmuoum new cowumOMOchmuH mafiummoumOHQ pom .mcwcmflanao .wcwucHum umnESH pom .uwama .aasm cowuosuumcoo wcwmflucmcoumz ucoEafiscm Hmowuuomam mHmumE maouumwcoz Hmoum cam couH muoapoua nmwaam paw mwnumpoom mwmum>mm maauxme .wH .5H .0H .ma .qa .ma .Na Hmuos omcoqmmm oz coflumumao coaum8h0mcH mmOOHEEoo wcwumawOfiuumm manmms uoz muumsncH wMHmDQzH rm mmmzommmm mmfi mo zonM co po .pm>oe .ucwE%OHdEm owed .N.n m o.ma m mmpmazocx ucmHOfiwmsmcH fie a m.~ H 92 m . wcflmafiflama uoz N.Nc He o.qm «a oq q N.mm HM we NH manmma mwmuaoo amnesz mwmucmo uonEDZ mwmucmo monasz mwmuaeo umnssz mmmucmo amnesz them nuwm aumm lumm luwm muowmumo Hmuos mummamc< mucmucnooo< pmumu mmuquEou umoewmo Hmflocmswm lumno wcfioauomum ufips< mo senses m>Hu3omxm wmflnu {Imaouo mmmHmma usonuw3 0m>oE 0m: .ucmemoaasw uwoa 0m: .pmufiumu mums .OmuuflEEoo uflwam mo panama pwwcoa on oumz 0:3 omonu pounaocfl >uowmumo mfisem 0.00H mmm 0.00H l ! 0.00H I I‘ll 0mm 0.00H m sum 0.00H «a HmuoH 0.0m 00H H.NN mm 0.0m .mfl 0.0H mm 0.0m 0m ownedmou oz H.mn 0mm m.mm 00H 0.00 00 N.Hw mmm 0.0m 00H Hmu0u03m 0.0 mm n.q Ha n.q ma m.m q mumcuo ~.s mm o.oH ms m.m as m.H as mwamaaocx unmauaeesmaH m.s mm ~.s as H.m mm o.HH ea wcfiumaauauuma “oz 0.00 mmc 0.mq HHH n.qm 00 0.00 mmH ~.mm mm manmmb wwmuamo Honeaz mmecmo Hensaz mwmucmo nonesz mwmucmo umnesz mwmucmo umnesz lumm them II. IMWW, Inmm lumm zuowmumo HmuOH mummamc< mucmucsooo< emsmu mmuufiEEou umoewwo Hmfiocmcfim Ismzo wcflOfiuomum uwva< mo umpsz m>eusomxm wmflnu maouu mmHwn kuquOEm a mamoHeOgu mmcflaudfia paw mafio mmmEOUm 0cm coflumuuoamnuuH weauwn o a new .mcHanHasa pd u . aaacaum O m umnnsa new .uoama .afism coHuoauumcou m wcwmfiucwxuumx H uconnfiuwo Hmowuuooau H mamuofi mucusmwcoz meum 0cm COpH muosnoua nmflaam 0cm wmsumvoow mwmuo>wm a asauxwe muumsncw mm «H.n mmficmaeoo mo mmmuceoumm 0H moficmaaou mo smnesz xcmafiou am meHummHQ no mqmHusomxm menu mumuomuou mNMGOOmmm waaagamsom mozHHmmz MMHHHXEOU HHQD< mHthe board, chiefexecutive officer, and external auditor;li(2.80 percent)tx)the board, chief executive offi- cer,znulthe financial officer; andli(2.80 percent) totbe board, or the chairman of the board, chief executive officer,znnicorporate secretary. Of the remaining 23 (16 percent) respondents, 16 (11.03 percent) forwarded the minutes to the chief executive officer, 1 (.70 percent) to the external auditor, 4 (2.80 percent) retained the minutes in the committee itself, and 2 (1.4 percent) sent copies to those officers affected by the minutes. It appears that boards of directors are the most common recipients of the minutes, chief executive officers are second most common, and auditors and chief financial officers are third. It is perhaps worth noting the way in which one committee chairman approaches the minutes. In those cases where I am the committee chairman, [I keep] notes of the meeting myself, drafting them up in min- utes form immediately after the meeting and then having copies of these draft minutes distributed as soon as possi- ble to other members of the committee for their approval or correction. In my opinion and in my experience, approved minutes of each audit committee meeting should be distributed to the chief executive officer, the chief financial officer, and for filing to the corporate secretary. The audit committee chairman should report on each audit committee meeting at the next ensuing meeting of the board and, of course, the minutes will form the basis for his report. Composition of Audit Cammittees and Characteristics of Committee Members The results from the request for membership information and the responses to the questionnaires yielded valuable information on 82 the composition of audit committees and on the characteristics of committee members. The following will be discussed: (1) the propor— tion of company officers on their own audit committees; (2) the position of the company officers and the prOportion of the chief executive Officers who serve on their own audit committees; (3) the principal occupations of nonofficer committee members; (4) the number of committee memberships held by the individual members; and (5) the number of years of committee experience of the members. The Proportion of Company Officers on Their Own Audit Committees The Ontario Business Corporations Act stipulates that the audit committee be composed of not fewer than three directors, of whom a majority shall not be Officers or employees of the corpo— ration or affiliates of the corporation. The evidence gathered through the request of membership information in the early stage of this research and the responses from questionnaires to audit committee members, as presented in Table 4—7, indicates that this legal require— ment is followed by the companies. Of the 463 committee members studied, only 128 (27.65 percent) are company officers. Of the 194 members responding to the questionnaires, only 38 (19.59 percent) are company officers. Mautz and Neumann show a similar prOportion in their study of voluntary audit committees, 22 (23.1 percent) of the 95 being company officers, while 73 (76.9 percent) are nonofficer directors. 83 .umom HmHocmsHm man 00 mesmHHnaa muouomsHQ mo 0souomuH0 mnu Eoum wmchuno mmB meowumasooo Momma .mumnama so aowumasowaH anew 00.00H \‘1‘ O\ H Ln H (D m H0.00 0 00.0H 00.00H mm.Nm m \0 \T Lfi m m m0.NN (D N r—I mmmsoammu muHmGGOHummaw Bosh mnowuma IuowaH mHnmumnama sow mummsvms Bosh ammuamo senaaz mwMuamo smnfinz mwmucmo Hmnauz numm numm Ismm Hmuoa smuwmmo umonm 0amaaoonaoz zanafioo mmuuHEBoo uHun< mo sense: mMMHHHzEOQ HHQD¢ Z30 mHmmH zo mMM)4uuo wzmn cu hamano Hamfim m pow mfinflmmomafi mmB uw umnu wmumoflwcw uamvaoammu econ :.mabmuflmmpas >HHMuou you use manmummmua ma ufi: umnu nmuoa was oa vmumzmcm unencoammu mcom 00.00H owe 00.00H I ll I I 00.00H oo 00.00H «ma 00.00H HOH Hmuoe mNH 84 a ow. 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mnu LHHB 3wH>wm H H H m.H H H mcoHumpcmEEouou HHOLH use .mwchcHw uHmLu .pO>Hoomu coHumuwaooo .xuoz HHmcu co mcoHuoHHummu mam .mucmHuOmxm HHmzu .qunm ecu mo coHuwHa IEoo :o .mHOOHpsm ucovcedmncH ecu SUHz 30H>mm «do IIIMfim um> Ou mcoauocsm mmwGOQmmm Ho mwuucmuumm cmcHnEoo >3 wcchmm . washm zzHQZH mo wmdxzbm «Hlm mHmHusomxm mmHno u omu ”muoz q m.moo.H m m q q mmuuHeaoo uHusm mnu mo mGOHu locum omanHnmummIHHms mo umm < N o.HnN.H N N N m mmuuHaBoo uHusm one mo mm>Hu Iomnno uwanHanwMIHHmz mo umm < m m.mmm.H q n m N umOHmmo O>Husowxm meno mumuoauoo ecu mo uuoaQSm was GOHumummooo HHsm m m.moN.H m w m m muouomqu mo puwon msu Ho amongsm paw GOHumummooo HHsm H o.Hmm H H H H mumpsma omuuHaBoo qusm one No museumdaou Aflwawm 358a Hades SH «o 92 08 HHmwm>o an wcHxamm wuouomm mmbomo mach HH< I MHHHHZZOU HHQD< MBdmommou m>HHUmmmm z< mom mmoauoum Hm>oH m.uouoman mnu mGOHuoc3m Houucoo paw uHusm mzu GOHuamuum vmmmmuocH CH muHsmwm muouHusm Hmaumuxm m.cOHumuoauoo wo moawpcmdmvcH ecu mmouomaHom muamamumum oamch mupuonuoo mo muH>Huomnpo mnu ou mm mucmamumum HmHosmaHm muons ou wocmunmmm venom mo>HU 0.00H omq w.N NH H.mH No H.wm mum menu lHu 0.00H owe N.H o w.OH Nm o.wm NNq um ou 0.00H owq N.N NH m.MN NHH o.¢N 0mm ecu o.ooH omq m.N «H m.NN NMH o.mo «mm HmH wo N .02 N .02 N .02 N .02 II,HmHOH mmmGOmem 02 mm» 02 mmmGOmem muHNOCmm szHmZOU mmbomo mach HH< I mmHHHEEOU HHQD< ma¢mommoo m>HHommmm z< mo mHHmmzmm MNIm mHmm mo HomH mnu wmumOchH asouw mHnu CH %uHuoth OLHO .wcoammu eon an whommumnu new mmmuuHano uHusm nuH3 wuamHHo on we: snow H .GOHGHQO BHHM m mmmudxm cu moamHumdxm no sOHumEHOMSH udeOHmmsm mo xomH msu pmumOHpaH msoum mHSu cH NHHNOmmB exam all w.0H 0.00H owe m.oN Nm o.mo Hmm o.OOH NH e.Ne «mm N.NH OH m.qe on mumsHmam HmHucmcHN 0.00H co q.w an m.mH m m.wN Ne mucmucsooom uwumuumno waHOHuomHm 0.00H qu q.¢H mmN m.0H 0N m.mN qu mmouuHano qusm mo mumpEoz c.00H HOH m.OH HH m.m m N.Hm Nm mHmOmeo m>Husooxm mmHno N .oz N .oz N .oz N .oz Hmuoa mmsommmm mmpwmmHQ mmsm< oz mmmGOmem mmbomu HH< oNlm mHmHHUMhhm HHuoommoaH mH wouuHEEoo uHosm cm HozuoLB onuuoomo ou mamas OHnmcommoN oc mmB oumnu omsmoon oc oopo3mcm mucooGOQmmu muco3Hp .csoax mums mmoco>HuommwooH ecu NH uomwwo wwuo>om cm on deos oumnu umnu mmumsmcm mucoOGOQmou mem 0.00H mNH o.c m o.q m N.mm men w.Nm Hq .mucoE Imumum HmHocmaHm m.c0HumHoaHoo one No NHHHHnHomuo one so uoowmo mmHo>om cm mm: oouuHEEoo uHosm oumNOQNoo m>HuommmocH a< .m o.OOH mNH N.m q o.w OH o.Nm oq w.om Hm wowuuHEBoo uHosm w>m£ LOHcB mGOHumuoaHOo omOSu now mHanHou mHOE mum mquEmumum HNfiUCNfiHW HNDCCQ mfiH .m. N .oz N .oz N .oz N .oz N .oz Hmuoe omcomwom GOHCHQGI oz mow oz so How mHmmm oz mmmcomwwm mHm>Houaam pow muouomuae no canon may Ou cosmmwansm uwmnu muowmn mucmfimumum Hmwudmfiflw HQDGCM mu.“ Uflw mcowumuwoo m.%cmano onu we cowuocam 3ma>ma ucmucmomncH cm mm m>uwm 09 .m o.ooH Hoa o.H H .o.s s o.oH HH m.sm mm s.Nm mm samsaou mnu mo mcowuucSM Houucou Hmcumucfi mnu Cu coaucmuum HmCONunwm m>flw 09 .q o.oo~ HOH o.a. a o.q q w.oa ON m.No we m.nm mm muouwvsm adduced Imncfi ago an cmfiuomawa coHuocow ufivsm man cu coaucmuum HmCONquvm m>Hw OH .m o.ooH HoH o.m m 0.0 o w.NH ma m.mq cc N.NN mm muouwvam ucmwcmamvcw one cuwa uumucoo Hmcomuma macs cam uumuwn :uw3 mucuomufiv umUHmmordoa mvw>ouo OH .N 0.00H HoH o.~ N o.H H o.q q o.qm mm q.wm mm mucwsmumum Hmwucmcfiw Hmsccm ecu mo 3mfi>mu one 0.00H HoH o.H H o.H H o.m m o.mm «m «.mm 00 ufinsm ucmncmamucfi was mo muaamou ecu we 3mfi>mu one o.ooa Hoa o.~ N m.m~ om s.am mm “.om am m.m s usage “smegma rmvcw ago you mucmEmmamuum wnH o.ooa Hod a.m o N.wm om m.wm mm N.¢N mm o.~ N mucuflvvm ucmvcmamvcfi ago we cowumcHEOC mLH I wcwnammma mawmumc we .maon3 m mm .mHOuomawv mo vamon mzu m>mwamu OH .H N .oz N .oz N .oz N .oz N .02 N .oz HmuOH ammommom oz HH< um ucmuaomEH uoz ucmuammEH ucmuuomEH mum> mmmoousm ucmuaooEH uoz wmmcommom mmmUHmmO m>HHDUmxm mmHmo me<¢omzoo I MMHHHZZOU HHQD< mHmHHmnz m: umnu wcfiumUchw :ONumosu wnu Sofia vmmuwmmfic ucmvcoamma wcoo :.muouavam mo sham udmumoaou m on: xcmano mnu m“ ucmuuooefi uoc: mmz was» vmumowvcw nonuocm :.vumon wumHano on» an meow on vaaonm: coaumdfian on» umnu vmumoavcfi moon .zflwuouomwmwummca maou mm3 unusudaoaom Heufivsm mau mmoflda uamuuooafi woo was menu umnu vmumuavdfl ucwvcoammu mcom Nmma oc mca Ham mmm mac c.00H «as H.~ s ~.e m m.om oo N.oo mad Hm>ouddm you muouumuae mo specs was on scammaannm “Nona daemon mucmaoumum Hmaodmcfiw Headed mug mam macaumuooo m.%cmaaoo ago no aowuodam 3mfi>mu ucwbamamvcfi cm mm w>amm 0H .m “I v-i N o.oo~ «ma o.H m H.m o N.m NH o.Hm mm o.mm mo .hdmoaoo onu mo mGONuocsw Houucoo Accumucw onu Ou coaucwuum Hmcowufivvm m>ww 0H .q o.oo~ «ma H.m o o.~ m m.m ma o.mm NoH o.~m No .muOqunm ucwvcmowuca ecu an umeuowuma doauocaw uavam was ou coauamuum Hmcowufiovm m>Hm 08 .m 0.00H «ma N.m m N.N ma m.oH mm o.mm so H.mm on .muoufivsm ucmncma Imvcw mnu nuaa oomucoo Hmaomuoo waoa use uumufiv sufia muouomuwv HMUNMHOIao: ovw>ouo OH .N o.o0H ssa o.a m s.~ m o.m as m.o~ Nm s.ms mNH mandamumum Hmaoamaau Hmscam was no ama>mu was o.oou «as s.H m s.a m H.m o ~.m~ as m.mo mmH sauna ucovsoamvcfi onu mo muaamou ecu mo 3mw>mu 05H o.ooa ems H.m a s.s~ as w.m~ om m.om oo m.~H mm “seam samecmaoeaa was now muaoammamuum use o.ooa sma .N.s ow o.mm ass o.~m was ~.s~ as 0.0 ma roofless damecmameca was No soaumcaaoc was I wcfivumwmu mafimumu mo .maoca m we .maOuomufiv mo vamon mnu m>mfiama OH .H N .oz N .02 N .oz IN. .02 N .02 N .02 Hooch wmaomwwm HH< um usmuuomaH ucmuaomEH ucmuuomEH mwmomasm oz acouuoaBH uoz uoz >Hm> mmmcommum meHHHZZOU HHQD< mo mammzmz I NMHHHZZOU HHQD< maotaam tau mucuumaue no canon was as scammwebam Hausa mu0mmp mademumum Hmfiocmcfiu Hmsccm mu“ cam meNumuooo m.>stEoo ecu mo dowuocsm 30H>ma udmudmamnca on ma o>umm OH .m c.00H 00 I I I I m.oa 0H o.om om m.mm om acmdaoo was we mcowuucaw HomoeoU Hmcawucfi was ou coaucmuum Hmcowuannm m>ww OH .q o.ooH oo N.H H I I o.m m o.mq mm m.mq mm mucufivsm ucmvcmomucfi was an coauomawo cowuocsw uwvzm ago as coaquuum HddOfiufiuvm m>fiw 09 .m o.ooH os I I I I m.m N m.mm ON «.mo mm .muouaeam samecma Iowa“ onu cows uumusou Hmcomuma duos mam oomuau nufia muouuouav umoHMMOIcoc mvfi>ouo 0H .N 0.00H 00 I I m.m N m.w m N.oH OH N.HN me modmfidudum Hmfioamdfim Hmsccm ago we 30a>mu may o.oo~ co I I m.m m o.m m m.m~ «a «.mo He uavsm ucmudwdmvcfi ecu mo muasmma ecu mo 3ow>mu one o.ooa as I I «.ma as m.m~ NH «.mm 0N o.o~ NH uueam ”successes“ was new mucosmwcmuam use o.oo~ 00 I I m.m~ NA o.oq em o.o~ NH N.HH N muouficsm acmvcmomvcfi ecu «0 noaumcfiaoc one I wcfivumwma mafimumv mo .maocB m we .muouumawu mo numon on» m>wHHmu OH .H N .oz N .02 N .oz N .02 N .02 N .oz HmuOH m«GOQWmm HH< um ucmuuomEH ucmuuooEH ucmuaomEH o oz ucmuHOQEH uoz uoz >aw> memo pom mmmcommmm mHzcmo80o ecu we cOHuucsw 3mH>mu ucmvcmdmvcfi cm mm m>uwm 0H .m 0.00H mNH q.N m N.m q N.m a q.Nq mm m.m< Ho Namasoo ago we mCONuudsw Houucoo Hmcumucfi mnu cu cowucmuum HmcoHquvm m>Hw 08 .c o.OOH mNH s.H N s.N m m.w NH o.Nm ms N.mm as mucuuesm sameamaaeca we“ as emeuoNuma coauocsu ufiuam mcu ou cowucmuum HmsOHquem m>Hw eh .m 0.00H mNH o.H N «.0 w o.mN um w.om we o.mN Nm mucufivsm ucwvcma ImvcH mSu zufia uumucou Hmcomuma mace new uumuHu nuHa muouomuflv amUHMNOIcoc onw>ouo OH .N o.OOH mNH o.H N N.HH «H 0.0H oN N.Hm mm o.oq om mucmamumum Hmfiocmcww Hmsccm wcu «0 3wN>mN any 0.00H mNH o.H N c.m N c.0H NH w.om we o.mq mm uHcsm unmomvsH mnu mo mqummu may we 3mH>mu one c.00H mNH q.N m o.NH NN w.Nm Hq q.¢m me m.NH. oH qusm ucmcsmmmvcH mSu pow mucwamwsmaum one 0.00H mNH q.N m N.MN aN c.qm me m.mN om N.HH «H muouwvsm ucmccmdmocH mnu mo coNudeEo: may I mcfivumwmu mHHmumv mo .mHons m mm .muouoman mo mason mnu o>mHHmu 09 .H N .oz N .02 N .oz IN .02 N .02 N .02 HmuoH mmummmmm HH< um ucmuuomfiH ucmuaomaH ucmuuomEH mwmoousm oz ucmuaooEH uoz uoz >Hm> mwmfimmmmm mHm>Hwvcw some new omooommu on mo Hones: on» On wan mum mHmuou uwHHosm mnu .owq on oHoonm Hmuou asemezc 233 can m Nmo mom moo mam N mmm H mnq H o.o0H «no a.w Ne H.N 0H m.o Nn H.Ho ch H.0N mmH o.No cmN .Hm>oaaom new muouuouHo uo vumon onu cu oOHmmHanam uHmnu muowwn mucmamumum HmHu Icmch Hoodoo mow van mcoHumuuoo m.ycmaaou any mo oOHuucou 3oH>ou ucmocmamnoH am no o>uwm oy .m 0.2: n: $2 an 9m 3 «.6 Na H.NN NS «.3 smN Nam SN €8.58 9: No 28383 N828 HooamucH unu cu defiucmuum HmooNuHoom m>Hw oy .c 0.00H cue w.NH no n.N NH m.HH mm N.om now m.Hm NQN N.qm moH mucuavsm acoucmomnoH unu an owEaONNma ooHu loosu uHoao mnu cu cofiuomuum HmcoHquom o>Hw oy .n c.00H woe N.mN NHH N.o aN o.oH aw w.en 0mm o.nm oNH N.Nm cNH mucuHoom uneconomocH «nu nufia uumucoo Hmoomuwo duos woo uuoafiv nuHa ououoouwv aonwwocoo ooH>oao oy .N o.ooH Mme o.mH No o.e NN q.m oq o.nm HHQ m.wN omH H.Nm mNN muouamuouo Howuooon Hmsocm wnu mo 3oH>ou any 0.00H one n.w oe o.m NH N.m NN n.Hm cmc H.oN an N.Ho HoN ufivam unmoowomvofi onu mo muHommu mnu mo 3ow>wu ony 0.00H one a.nn NON m.mN oHH q.NN NmH H.q¢ NoN o.Nm omH H.NH mm NHvsm unmvcmomocH ago you mucmsowomuuo any 0 ooH one m.oo Non n.0m omH o.om moH H.Nm NmH n.mN oHH m.N on mucqusm unmooonmvoH mnu mo oOHumoHao: any I moHvumwmu mHHMuoo mo .mHona o no .mNOuomqu mo canon onu o>wHHou oy .H N .oz N .oz u .oz N .oz u .oz N .02 N .02 Hmuoy undue Hmuoy HHQ um ucmuuooBH uoz Houoy ucmuuoNEH ucmuuonEH >um> momoauz. uoouuooaH uoz n momdoommm mmboxo 44¢ I mmyszzoo yHQD< mymm .w o.OOH HoH w.oN HN ¢.m m m.wH oH N.Hm Nm m.oH ON seaflesm HmoumucN menu mnu LUNz wmaaowooua ufiodm Hmcumuaw mo wooum mnu 3mw>mm .N c.00H HoH o.« e o.N N m.q m N.Hm Nm q.Nm mm Hm>oudom new wuouumuNo we oumon mnu cu coammHEnsm awonu mHOWon mucmswumum HmfiocmcHw Hmsccm mumaoouoo mnu 3wfl>mm .o 0.00H HOH m.MH «H w.cH NH m.mH mH w.mN cN N.qN mN muouumuflo we oamon mnu yn ow>oaaom mum monomwa mmwnu eyewmn mumoHonmaonm ou muMOdwu Hmwucmoww EflumucH 3mH>wm .m 0.00H HOH m.q m I o.« q N.om Nm q.qm mm mEmummm Houucou Hoopwucfl m.NcmoEou mnu wo cowuosHm>m uwwnu mucuHozm ucmoowomocfi mnu nuHB 3ww>mm .q 0.00H HOH o.N N o.N N o.N N N.mN mN m.mo co macaumocmasouou afimnu now mmcflooflw afimnu .oo>flmuwu GONumamoooo .xuo3 uHmnu co mGONuoNaummu Nam .muoowumoxm uHmnu .NNmnm mnu mo coaumHo IEoo no .muoufloom unmoCmomocN mnu nuNB 3mH>wm .m c.00H HoH m.m oH m.MH «H m.0m Hm o.Nm mm m.NH NH omooHuoH on On mwuzomuouo com .mmoauso .mooom mu“ .omumHoEou mH ufiosm onu maowmn .mNOuwosm uomoomomocfi mnu cows mwoumfin .N 0.00H HOH w.mH 0H N.©N NN w.om Hm N.qN mN o.N N mucufiozm nowoomamocfi wnu mumcfisoz .H N .oz N .oz N .OZII N .oz N .oz N .oz . Hmuoy mmoocmmm HH< um ucmuaomEH ucouuooeH boomaooEH mooauocay oz oomuuooEH ooz uoz >uo> . mmmcommmm mzmuHhmO m>HHDUmxm mmHmo mywHHmn mucwoaoomwu Nomzm .ucoauumooo pause HocumucH oo .w.o .hcmoeoo uHonu :H couuuoow noon 0: mm: uuwnu no mmuuHEEoo any an moon on uoa vHoonm cowuudau onu umnu voumowucw on3 mucoocoomwu omonu you ma mHnyc o.ooH «0H m.MH NN w.m oH n.0H 0N m.mN on o.on mm m.oH oN madam uwvoo Hmcuoucw mnu mo muuooou onu 3mH>um .w o.OOH «mH m.HH MN N.« m N.N mH o.«H aN N.Nn «N N.NN m« neuuoso HoduouoH umwnu onu now: moaovoooua afloam Housman“ mo mooum «nu 3ow>om .N o.ooN «ma I H.N a n.N n N.N N o.«m so N.Nm NNN Hm>ouaam you muouomuae no vuoon mnu ou scammfianam sauna ouowmn muowamumum Houuomawu Hoodoo ououoouou onu 30H>wm .o o.ooH «mH N.« m e.« m «.NH «N N.NN m« o.«m co o.HN N« mucuomuao uo canon onu an vm>ouonm one muuoamu omwnu ouowmn mumoHonmumnm cu muuoowu Hmaoomoaw awuouca 30N>ox .n o.ooH «mH I H.N « H.N « n.N n 0.0m HN N.om OHH maoumyo Houuooo HocumuoH m.homoaoo onu mo coaumon>o uHmnu mucuHosm uomoooomoau onu nuHa 30w>om .« 0.00H «mH I H.N « m. H n.H m N.NN o« N.NN o«H odowumoamsaoomu “Hana can mwowmdam numnu .vm>Hooou coHumuwoooo .xuoa uaonu do occauowuummu Nam .ooomaumaxo uHonu .ufiooo on» No coHu ImHosou co .maoquac uoovdooooow on» nuHa 30a>um .m o.ooH «mH N.N N N.m OH N.n OH n.oH Nm o.N« mm m.oN Nm omnsHuoH on ou mousvoooun vow n .3033 .maoom 3N 63338 3 Sean ofi maommn .muOuHooo ucovchmvoH onu nuaa mmsomHo .N c.00H «mH N.N mN N.c mH «.Hm Ho N.NN mm N.NN o« N.N «H muouaoam ucmvomomoow one mumoNSOZ .H N .oz N .02 N .oz N .02 N .oz N .02 N .oz Hmuoy «anmUNHmm¢ uoz oncommmm oz HH< um unduummmH unnuuomEH ucmuuomEHINmm> mooauoonm acouuooaH uoz uoz noncommom mmmyyHZXou HHQD< ho mmMMZmz I mmyszzoo HHQD< Nymm .w 0.00H on I N.H H N.ON OH m.w« ON m.MN «H Houfiosm Hmoumucw wmfino mnu nufis mmuoomoouo uHOom Hmcumucfl mo mooom mnu 3mH>mm .N 0.00H OO I I I O.mH O O.mm Hm Hm>ouaam now mHOuomuwo wo oamon mnu cu cowmmwenom ufimnu mu0wmn mucme Imumum Hmwucmofim Hmaccm mumuoouoo mnu 3mw>mm .O o.OOH OO I I N.NH HH N.Hm Hm 0.0m mH maouumufiv mo Oumon mnu Nn Om>ouoom mam muuoomu mmmnu muommn mamvHon Imumnm cu muaooma Hmwocmcww Baumuofi 3mw>mm .m 0.00H CO I I N.HH N m.mm ON O.mm mm mamummm Houuooo Hmoumucfi m.%amoeou mnu mo cowumsHm>m uwmnu mucuwoom ucmvomomocw mnu nuwz 3mH>mm .« 0.00H on I I I N.N m N.HO mm mooHumOCmesouma Mm ufimnu one mwofiooww awmnu .om>fimomu ca oowumuoooo .xuoa awmnu co mcowuuwuummu Nam .moamfiammxm uwmnu .uwosm mnu we aoNumHo IEou so .mHOufiwsm uamocmommow mnu nufl3 3mH>mm .m 0.00H CO I N.H H m.wH HH N.H« mN m.mm MN omoaHuzw mn ou mmaoomuouo tam .mmoouso .mooom mow .omumHoeou mH ufloom mnu mNOOmn .mHOuwwsm uomocmomvaw mnu nua3 monomwn .N 0.00H OO N.H H N.OH moH N.NN NH m.mm ON o.ON NH maouwoom unmvomomoofi mnu mumoNEOZ .H N .oz N .oz N .oz IN .oz N .oz N .oz Hmuoy mmcoommm HHN ufi unmuuomeH momuuomEH nomuaomEH mcoNuocom oz ucmuaooEH uoz uoz Nam> . mmmoommmm myzmm .w 0.00H mNH «.N m O.H N O.m OH 0.0« NO «.Om m« noufiwsm Hmcpmuofl mmwnu mnu nufla mmusomuouo uflvsm HmaumuoH mo mooum mnu 3mfi>mm .N 92: NH 04 N N.N s is N N.Nn E 92 S 363% SN 33828 No oumon mnu ou scammHSnom ufimnu mu0mmn mucme Imumum Hmwucmcww Hoodoo mumuoouoo mnu 3mH>mm .O 0.00H mNH «.N m O.« m O.NH NN O.Nm NO «.NN mN maouomuHo mo oamon mnu Nn om>ouoom mum muuooma mmmnu mu0wmn mamOHon Imamnm cu mupoomu Hmfiucmch Ewumuow 3mw>mm .m 0.00H mNH O.H N I O.« m O.Nm N« w.OO ON memumxm Houucoo Hmcumucfi m.>cmoEoo mnu we coaumSHm>m ufimnu mucuHosm uomUCmomoow mnu nuH3 3mH>mm .« 0.00H mNH «.N m I «.N m O.NN Om «.OO mm mcoHumoomEEoomu uwmnu vow mwcHocHw uwmnu .om>wmumu coaumpmoooo .xuoz uHmnu do moONuUNaummu New .moomHNmoxm ufimnu .uwuom mnu mo sowumHo I800 so .muoNHoom ucmoomomvcH mnu now: 3mH>mm .m 0.00H mNH «.N m O.m N O.MH NH N.N« Om N.Hm Om omwsHoaN on 0u mmusomooua com .mmoouso .maoom mow .omumHoEoo mH ufioom mnu mNOOmn .mNOuwoom uanCmomoow mnu nuws mmaomwa .N 0.00H mNH «.N m 0.0H ON N.mm «« «.«m m« O.NH mH mucufinom uomwcmomoow mnu mumoNEoz .H N .oz N .oz N .oz N .oz N .oz N .oz Hmuoy modoNWmm HH< um ocmuuomEH ucmuuomEH nomuaomEH oz ucmuuooEH uoz ooz Npm> mcowuuosm I mmmcommmm mymyqmm .O 0.00H mN« O.NN HOH «.O NN «.NH «N N.ON «Nm m.O« NOH 0.0N NNH noqusm Hmcumuaa mmHno mnu nuHa mmuovmoouo quom HmcumucH mo mooom mnu 3mH>mm .N 0.00H OO« N.O ON O.N O N.« ON O.NO Om« m.Om HNH N.Nm OON Hm>ouanm uON mucuomufiv mo oumon mnu ou COHmmHEnsm uHmnu mNOOmn muomamumum HmHuomon Hmscnm muwuoouou mnu 3mH>mm .O 0.00H O«« H.Nm O«H «.OH O« N.HN NO O.NO mom O.N« OOH N.ON OHH mucuumuHo «0 oumon man an cm>ouoom mum muuoomu mmmnu muowmn mumOHonmumnm cu muuoomu HoHucmofiw EHumucH 3mH>mm .n 0.00H OO« m.m ON O. « «.« HN N.«O ««« N.ON ONH «.wm «NN msmumhm Houucoo HmcumucH m.>:mafioo mnu we cOHudem>m uwmnu maouHuom ucmvomamvoH mnu nuHa 3mH>mm .« 0.00H HN« «.N HH N. m N.H O O.NO OO« O.«N OHH O.NN ««m mGOHumoomaaoomu uwmnu was mwcchHw uHmnu .om>wmumu coHumumdoou .xnoa uHmnu co moOHuUNuummu New .muomHnmoxm uwmnu .qusm mnu No scam ImHaaoo co .muoanam ucmmcmomvnH mnu nuHa 3mH>mm .m 0.00H on« N.NN ONH H.N Nm N.ON HO N.NN NNm n.«« OON N.ON NNH .omvaHooH mn cu mmuavmuoao com .mmoaaoo .maoum muH .nmumHoEoo mH uHoom mnu muowmn .mu0uwvzm ucmvdmomOdH mnu nuHs mmoumHO .N 0.00H O«« 0.0m NON 0.0N OHH O.NO .m«H H.O« NNH H.Om NNH 0.0H «« mucuHoom uomoomomoow mnu muosNEoz .H N .oz N .oz N .oz N .oz N .02 N .oz N .oz Hmuoy «coho Hmuoy HH< um nomuaomaH uoz Hmuoy ucmuaomEH ucmupomEHINum> moosuocnm ucmuuoasH uoz mmmCOQmmm mmbomu HH< I mmyszzoo yHQD< mymm .O 0.00H HOH w.Om Hm w.mH OH 0.0H OH o.qm mm . uOuHcsm HmcumucH mecu mnu cuHB mmunmmuoua uwusm Hmcumucw mo maoum mcu 3mH>mm .N 0.00H HOH O.« c w.mH OH 0.0 O N.¢N mN Hm>ouaam pow mucuumqu «0 numon mnu ou cowmmHEnsm uHmzu mpomwn mucmsmuMum HmHucmch Hmsccm mumnompou mnu 3mH>mm .O 0.00H HOH O.NN ON 0.0H NH O.NH OH O.Nm mm mucuomqu mo unmon wsu Np vm>oumam mum muuoamu mmmsu mu0mmn mpmnHonmumnm Cu muuoumu HmHucmch EHumucH 3mH>mm .m o.OOH HOH 0.0 O 0.0H NH O.w O m.wo Oo mamummm Houucoo HmcumucH m.NCMOEou wcu mo coHumaHm>m uHmLu mucqusm ucmvcmamncH mnu :uHS 3mH>mm .q o.OOH HOH O.N m O.mH OH O.m m m.ON NN chNumvcmEEoumu unnu tam mmaHuan unnu .vm>Hmomu :oHumumaooo .xpos uHmnu co mCOHuoHuummu Ocm .mocmemaxm uHmnu .quam mnu mo cowumHmEou co .muoqunm ucmwnmmmvcH mnu :uHB 3mw>mm .m 0.00H HOH m.OH ON 0.0H NH N.ON NN N.Om Nm umUSHocH mp ou mmusnmuoua vam .mmoausa .muoum muH .nwumHanu mH ansm mnu wMOan .muOqusm ucmncmamwcH mnu saws wmsumHo .N 0.00H HOH m.ON om 0.0H OH m.mH OH O.Nm mm muoUstm uamncmamwcfl.mnu mumcHEoz .H N .02 N .02 N .02 N .02 N .oz HMuOH «mHnmuwdmm< mwcommmm m>HuummwmcH w>Huumm%w uoz oz mcoHuucsm mummEHOOHwO mo mmmCm>Huummmm mmmCOQMmm mmmuHmmo m>Hfinumxm mmHmu mhdmommoo I mZOHHUZDm MMHHHZZOU HHQD< demommoo mo mmmzm>HHummmm on: mqmwx .w 0.00H «OH N.ON oq 0.0H Om 0.0H mm H.Nm NN Hoquam HmcuoucH mmHso mnu nuHa mmusvmuoua qusm HanuoucH mo maoum wzu 3mH>wm .N o.ooH OOH m.H m o.mH mm N.H N O.QN OOH Hm>0paam How mpouoman mo chaos «nu cu :onmHanam “HmSu muowmn mquBmumum HMHUSNGHM HNDGGN OUNHOQHOU mfiu 3wH>mm .0 o.ooH «OH O.NH «m N.NN «O m.wH om m.Hq om myouuman we numon mg“ mp um>ouaam mum muuoamu mmmnu mucumn mumnHonmumnm ou muuoamu HMHusmch BHumucH 3mH>mm .m o.ooH OOH N.H N m.0H mm ~.O OH 0.0N NHH mamumxm Houucou HmcumuaH m.O:mOEOU «nu mo coHumsHm>m uHmcu mucqusm ucwvcmamvcH wnu nuH3 3mH>mm .« 0.00H «OH m. H m.OH Nm N.m HH O.NN OmH mCOHumncmeEoumu pHmnu cam mwchcHw unnu .um>Hmumu cOHumumOoou .xuoa uHmnu co m:0HuoHuummu New .mucmHquxm uHmnu .anam wnu mo GOHumHQEOU co .mNOansm ucwwamamvaH mnu :uHB 3mH>mx .m 0.00H «OH «.NH «N 0.0H Om m.OH Nm m.Hm OOH nmwsHucH up on mmusnmooum vcm .mmoausa .maoum muH .nmumHanu mH qusm mnu muowmn .mHOqusm uamvamamvcH mnu nuH3 wmsumHO .N 0.00H «OH m.mN O« N.«N w« O.NH mm o.mm «O muOqusm ucwwawawvcH mnu mumcHEoz .H N .02 N .oz N .oz N .oz N .02 HmucH «mHnmoHHmm¢ mmmormmm m>HuomwwmcH m>Huumwwm uoz oz mCOHuuczm mucmfimomumm mo mmmmm>Huomwwm . mmmaOQWmm mmmeHHzmoo HHQD< ho mmmmzmz I monHUZDm mmHHHZZOQ HHQD< meHhummhm NII mqmmz uoc OHO mucmHHu mcu mmnmomn mHOmoHHaam uoc mum Omnwm o.OOH OO O.HH N m.MH w w.Hm Hm m.mH HH O.m m wwmum annm HmcumucH mcu mo muuoamu mcu 3mH>mm .m 0.00H OO O.HH N m.mH m N.Om «m «.MH O o.m m HOHHmsm HmcumOCH Ochu mnu LuHB mmusmmuoua uHusm HmapmucH wo mmoum mnu 3mH>mm .N o.OOH om I 0.0H o I I o.oO «m Hm>ouaam H0O mucuumpHv mo Opmon msu ou COHmmHEOsm “Hmnu mpoOmO mucme . Imumum HmHucmcHw Hmsccm mumuoapou mzu 3mH>mm .O 0.00H CO I «.MH O O.m« NN m.mN «H m.mH HH mucuumqu mo Oumop «Lu NO Om>ouaam mum muuoam» mmmcu muoOmO mumOHocmumLm cu muuoamu HmHucmcHO EHumucH 3mH>mm .m 0.00H OO I 0.0H O N.HN mH N.OH HH 0.0m Om mEmumNm Houucou HmchucH m.Ncmanu mnu mo coHumsHm>m uHmnu muoqusm ucmvcwamOcH wcu :qu 3mH>mm .« 0.00H OO I 0.0H O N.H H 0.0 « N.Hm O« mCOHumOCmEEoumu uHmLu new mmchcHw uHmnu .Om>Hmumu GOHumHmaooo .xuoz uHmsu so mcoHuUHuummu Nam .munOHumaxm uHmnu .ansm msu mo COHumHanu co .mHOOHOnm uamOCmmwvcH mSu nuH3 30H>mm .m 0.00H OO I 0.0H O N.Hm OH 0.0N NH m.mm MN .OmnsHucH mo cu mmusumuoua Ocm .mmoansa .maoum muH .OmumHanu mH uHOnm mcu mHoOmO .mHOOHOJm ucmwcmamvcH mnu LOHB mmsumHO .N O.OOH OO I 0.0H O O.mO Om N.O « m.mH HH mucqunm ucmmcmamncH mnu mumcHEoz .H N .oz N . z N .oz N .02 N .02 N .oz HmOOH mmHOmumem< mmCommym mcoz NOm cmcu mmwm mpoz go Now mcoHuucsm uoz oz Om Opromem mH coHuucsm mHzmm .O 0.00H OO N.HN m« O.HH N 0.0H O N.O « nequsm HmaumucH meSU mnu LUHB wmpsvmuoua unam HMCpmucH «o maoum mnu 3mH>mm .N 0.00H OO I O.HH N «.w m 0.0w m« Hm>o.Hham new mucuumuHO mo Oumon mnu ou :onmHEOsm uHmnu muommn mucmEmumum HmHucmcHw Hmsccm mumuoauou mnu 3mH>wm .O 0.00H OO O.m« NN O.NH O O.mH O N.ON OH mucuumuHO mo Oumon mnu NO Om>ouaam mum muuoawu mmmnu muoOmO mumOHonmumnm ou muuoamu HmHucmch EHpmucH 3mH>mm .m 0.00H OO N.HN mH O.HH N N.OH HH «.O« ON mamumzm Houucou HmcumucH m.N:mOEoo msu mo coHumsHm>m uHmLu mucuHODm ucmvcmamOcH mnu OOHB 3wH>mm .« 0.00H OO N.H H O.HH N 0.0H O N.ON O« mCOHumchEEoumu uHmnu Ocm mwcHOch “Hwnu .Om>Hmomu COHumumOoou .xpoz unnu no mcoHuoHuummu New .mucmHummxm uHmnu .uHusm mnu mo COHumHOEou so .mHOOHOSm ucmucmamOcH wnu :uHB 3mH>mm .m 0.00H OO N.Hm OH 0.0H O O.mH O m.m« ON OmODHucH mp ou mmpavmooua Ocm .mmomusa .maoum muH .OmumHanu mH uHO5m wnu wuowmn .mHOuHODm ucmncmamOGH mnu nuHB mmaomHO .N 0.00H OO O.NO mm 0.0H O O.m m N.HN NH mucunsm ucmvcmamOcH mcu mumcHEoz .H N .02 N .02 N .oz N .oz N .02 u . . .IIIIIIJflWI IMMJI II. IIIIIIJJ. .IIIIIIIII Hm op meOmuww < CMMwmm m>HuummOmcH m>HuumwOm mcoHuucnm coHuucsm O0 mocmfihomumm m>Huumwmm mHzHHommmm OIm mqm<8 APPENDIX I FACTORS FOR AN EFFECTIVE CORPORATE AUDIT COMMITTEE 9AA 245 neuumm mnu .mpoOmumLH .ucmuuanH umoe m£u mH mucHom HmOou ummon mnu :OH3 .HOH mp OH503 ucHoa Hmuou muH .ucmuuanH umoE mSu mm wouomm umun mcu vmxcmu mucmvcoammu HHm OH .mHamem pom .xcmu umnu CH mmmcoammu mo uwnesc mzu Ocm xamu mnu mo amneaa man OGHOHOHOHDE NO Omunaaoo mum mucHoa Hmuoy« « O.«mm HOH H ON N NN N ON N OH H N wwuuHEEou uHO3m mcu mo mcoHuucnw OmLmHHOmumm HHm3 Oo umm < m O.HOm HOH H OH « NN N ON H OH H OH mmuuHEEoo uHunm mnu mo mm>Huutho OmcmHHOmumm HHmB mo umm < N O.NON HOH H NH H NH H OH N mm « N umUwao m>Huaumxm mecu muwuoauou mnu mo upoamsm Ocm coHumuwaoou HHsm m O.«Om HOH H mm N NN H OH I HH O O muouowan mo Oumon mnu we uuoaasm cam aoHumumaoou HHsm H O.«OH HOH H I H N I HN H OH H mm mumnams mmuuHEEoo “Hunm mnu mo mucmumaeoo xcmm «mucHom mmmaomwmm mmcommmm O O.« « m.m O O.N N O.H H Hmuoe oz mucuumm Occhmm mmmUHmmo m>HHDomxm mmHmU mHHHummmm z< mom OOOHQHuumnno OmcmHHOmumm HHm3 mo umm < O 0.0HO «OH O OO N O« O OO OH NO N NN umUHNOo m>Hu=omxm mchu mumuoauou mzu mo anomasm Ocm COHumummoou HHsm ,0 L% 9“ O 0.0HN «OH O ON O O« « OO O ON I HH mucuumuHO mo unmon mnu mo uuoamsm Ocm COHumummoou HHsm H 0.0NO «OH O OH I OH N HO N ON N NO mumOEmE mmuuHEEou qusm mnu mo mucmuwasou xcmm «mucHom mmmcommmm mmcomwmm O O.« « O.O O O.N N O.H H Hmuoe oz mucuomm IOcchmO mmmHHHEZOU HHQD< mo mmmmzmz I OMHHHZZOU HHQD< MHHHUmmmm z< mom OOOHU¢M mmH mo UZHMZHuomOOo OmcmHHOmumm HHm3 Oo uwm < O 0.00N OO N ON NH O N O N umUHOOo m>Huzumxm Oszu mumuoauoo mnu O0 uuoaasm Ocm COHOmumaoou HHsm « O.NON OO N OH ON O H OH O mucuumuHO Oo Oumon mcu Oo uuoaaam Ocm OOHumumOoou HHSO H O.NOH OO N N « O O N OO mumOEmE mmuuHEEoo uHO3m mzu Oo wucwquEou xamm «mucHom mmmcomwww wmcommmm O « O O.N N H Hmuoe I. 02 mucuumm wcchmO I mmHHHZHOQ HHQD< MHHHummhm z< Mom mmOHoHuumOO0 OmanHOmumm HHm3 O0 umm < « O.NH« ONH H OO O OH N ON N ON H OH umoHOOo m>Hu=owxm OmHnu mumuoanoo mcu Oo uuoamsm Ocm COHumumaoou HHsm O 0.0H« ONH H OO « OO N HN H OH H OH mpouumuHO Oo Oumon mnu O0 unoaasm Ocm :0Humumaooo HHsm H O.HON ONH I O « O H ON O ON I NO mquEmE mwuuHEEOU qusm mnu Oo moawumOEoo xcmm «mucHom mmmcommum mmcommmm O O.« « O.O O O.N N O.H H Hmuoy oz mucuumm Odecmm OHOWHHHommmm Z< mom OOOHUOO «IH MAOHusomxm Ochu mumuoauou n omu« 0.00H OO« 0.00H OO« 0.00H OO« 0.00H OO« N.N O.N OH NH «H 0.0H NO 0.0N NHH O.NN NOH ON NH «« OO «H HN OO ON «O O« OH HH ON H.ON ONO 0.00 NN« O.«N OOO 0.00 «OO OOH N« NHH OO OO OO «O NO OOH «OH OOH O«H ON OO NO ON meuHHHOHmconmmu uHmnu O0 ucmaHHHOHsO mnu cH mmHuumxw Omnu mumu man mnu Ochumucou GOHumOHuHH HmHucmuoa umchwm .muouumuHO aonOOoIaoc mnu uoO OHHmHowamw .aoHuwuoauoo mnu Oo muouomqu ozu uoO coHuuououO vavm mwOH>opO Hm>mH m.u0uoouHO unu um mOOHuocsO Houucou Ohm uHO3m mcu ou coHucmuum OmmmmuocH cH muHsmmm muouHusm Hmcumuxw m.c0Humu0auou unu Oo ouamvcmamOcH mzu mmuuoOchm mucwauumum HaHocmcHO wumuoauou Oo NuH>HuumOno may cu mm mucwEmuMOm HMHucmcHO Oo mumm: ou mucmusmmm Omvvm mw>HO N .02 N .oz N .02 Hmuow HHmum>o wmcqmwwm oz Hmuoa 4 muHOmcmO mmbomo 444 I meHHZEOU HHQD< mHHHummmm z< mo OHHOMZOO HIO MHO