Due Care and Diligence Standards for Audit Committee Members
This paper examines the duty of due care and diligence as it applies to audit committee members in publicly held companies. Beginning with the SEC's 1972 recommendation to establish audit committees, the paper traces their evolving responsibilities through the 1987 anti-fraud recommendations, the 1999 Blue Ribbon Committee reforms, and the sweeping changes introduced by the Sarbanes-Oxley Act of 2002. Drawing on Keinath and Walo's analysis of best practices, the paper outlines key oversight responsibilities and highlights the gap between required and actual audit committee practices. It concludes that audit committee members must exercise increasingly rigorous due care and diligence to fulfill their accountability to shareholders.
- Introduction to Due Care and Diligence: Defines the legal standard of due care and diligence
- Historical Evolution of Audit Committees: Traces audit committee development from 1972 to 1999
- Sarbanes-Oxley and Expanded Responsibilities: How the 2002 Act broadened audit committee authority
- Best Practices and Oversight Gaps: Keinath and Walo's findings on compliance shortfalls
- Conclusion: Accountability and Ongoing Diligence: Audit committees must deepen diligence for shareholders
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What makes this paper effective
- Traces a clear chronological arc from the SEC's 1972 recommendation through Sarbanes-Oxley, giving readers a coherent legislative history without overwhelming detail.
- Grounds abstract legal standards in concrete audit committee responsibilities (e.g., the seven-category best-practices framework from Keinath and Walo), making the argument practically useful.
- Uses multiple authoritative sources — a regulatory body, a peer-reviewed journal article, and practitioner reports — to triangulate the same conclusion about expanding due diligence obligations.
Key academic technique demonstrated
The paper demonstrates synthesis across sources: rather than summarizing each source in isolation, it weaves together the SEC history, the BRC recommendations, and Keinath and Walo's empirical findings to build a single, cumulative argument that audit committee duties have grown and that members must respond with greater diligence. This is a model technique for short analytical essays in accounting and corporate governance.
Structure breakdown
The paper opens with a definitional anchor (the legal standard for due care), then moves chronologically through the regulatory history of audit committees, pivots to Sarbanes-Oxley's impact, presents an evidence-based list of expanded responsibilities, and closes with a normative conclusion about shareholder accountability. Each section builds on the previous, producing a tight, cumulative argument in roughly 500 words.
Introduction to Due Care and Diligence
"The duty of due diligence and due care has been defined, generally, as a requirement that each director and officer 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 accountable for knowing what a prudent person might have known. It remains the governing standard for determining legal duty in both corporate and financial contexts.
Historical Evolution of Audit Committees
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 considerably over time. That evolution included the establishment in 1987 of six specific audit committee recommendations intended to deter fraudulent financial 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 expansions, the BRC made further recommendations that resulted in rule changes by NASDAQ, the NYSE, AMEX, and the SEC (Keinath & Walo, 2004).
Sarbanes-Oxley and Expanded Responsibilities
In 2002, the role of audit committees expanded still further with the Sarbanes-Oxley Act, which increased audit committees' responsibilities and authority significantly. The SEC and stock exchanges 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 organized into seven general categories, along with a comparison of those best practices to disclosures of actual audit committee practices (Keinath & Walo, 2004).
Conclusion: Accountability and Ongoing Diligence
As the role of the audit committee expanded in recent years, so did the responsibility of its members to exercise due care and diligence. In a 2004 report, Nigh and Bevilacqua posited that mergers and acquisitions due diligence had "always been a good business practice. But in the wake of the Sarbanes-Oxley Act it [was] now essential." Tate offers a similar conclusion in his report The Annual Audit Committee Evaluation, pointing out that although an increasing number of functions and responsibilities were specified by statute, rule, or regulation, "an audit committee's standard of care remain[ed] significantly dependent on due diligence and prudent judgment."
References
"Duty of Diligence and Due Care." ChicagoBoardMinutes.com. Available at: https://corporateboardminutes.com/glossary/dutyofdiligence.dhtml
Keinath, A. & Walo, J. C. (2004). Audit committee responsibilities focusing on oversight, open communication and best practices. The CPA Journal. Available at:
Nigh, J. O. & Bevilacqua, L. J. (2004). Due diligence under Sarbanes-Oxley. Available at: http://www.towersperrin.com/tp/getwebcachedoc?webc=TILL/USA/2004/200404/NighBevilacqua.pdf
Tate, D. (2009). The annual audit committee evaluation. Available at: http://davidtate.us/files/Annual_Audit_Committee_Evaluation_Dave_Tate_CPA_Esq2._3.28.09_.pdf
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