¶ … Care and Diligence and Audit Committee Members
"The duty of due diligence and due care has been defined, generally, as a requirement that each director and officers exercise the care which ordinarily prudent and reasonable persons would exercise under the same circumstances (Duty of Diligence and Due Care)."
The concept of due care and diligence is intended to hold those with a fiduciary responsibility to a standard of care that makes them responsible for knowing what a prudent person might have known. It remains the standard for determining legal duty.
In the financial and legal community, due care and diligence is expected when audit committee members exercise their responsibilities. Audit committees first came into being when the SEC recommended that publicly held companies establish them in 1972. Audit committee roles and responsibilities have since evolved over time. That evolution included the establishment in 1987 of six specific audit committee recommendations intended to deter fraudulent reporting. Then, in 1999, the Blue Ribbon Committee (BRC) on Improving the Effectiveness of Corporate Audit Committees made recommendations for improving audit committee effectiveness. Following those...
The SEC and stock exchanges then responded by proposing new regulations and rules to strengthen audit committees. The authors of the legislation moved to establish audit committee best practices. Keinath and Walo prepared a compilation of best practices that was organized into seven general categories, along with a comparison of best practices to disclosures of actual audit committee practices (Keinath & Walo 2004).
Analysis of Keinath and Walo's report show that audit committees have to significantly expand their responsibilities to just cover practices required by Sarbanes-Oxley and NASDAQ. Exhibit 5 from the report Audit Committee Responsibilities lists the following responsibilities:
Oversee the financial reporting process
Monitor choice of accounting policies and principles
Monitor system of internal control
Ensure open communication with management, internal auditors,…
