Audit Committee Material Weaknesses in Smaller Reporting Companies

One of the critical elements of internal control over financial reporting is an effectively functioning audit committee. The Sarbanes-Oxley Act of 2002 (SOX) defines an audit committee as " committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer." Recent SOX section 404 filings by smaller reporting companies ("nonaccelerated filers," or registrants with less than $75 million of public float), however, indicate that some small companies still are struggling to develop effective audit committees. Examining the disclosures made by smaller reporting companies and then analyzing the available resources can be useful for small businesses seeking to establish and maintain effective audit committees. The SEC rules public companies to issue an annual report on the company's internal control over financial reporting and to include an auditor's opinion on their effectiveness.