Both the NYSE and NASDAQ require audit committees to consist of at least three independent directors who meet enhanced independence standards beyond the general board independence requirements. At least one member must qualify as an audit committee financial expert as defined in Regulation S-K Item 407(d)(5), meaning they have experience with GAAP, financial statement preparation or auditing, internal controls, and audit committee functions. In Gurpreet Bal's experience advising pre-IPO companies at Foley and Lardner, identifying and recruiting directors who meet the financial expert qualification is one of the earliest governance tasks in IPO preparation, typically beginning 12 to 18 months before the anticipated offering.
The audit committee's responsibilities extend well beyond reviewing quarterly financial statements. Under SOX and exchange listing standards, the audit committee is directly responsible for appointing, compensating, and overseeing the independent auditor. The committee must pre-approve all audit and permissible non-audit services. It oversees the company's internal controls over financial reporting under SOX 404, reviews related party transactions, establishes whistleblower and complaint procedures for accounting and auditing matters, and reviews the company's risk management framework. Gurpreet S. Bal advises directors considering audit committee service to understand the significant time commitment involved, particularly during the first year post-IPO when internal control frameworks are being established and the company is navigating its first annual audit cycle as a public company.
Audit committee members face heightened scrutiny in securities litigation because they are specifically charged with oversight of financial reporting. While the business judgment rule provides protection for good-faith decisions, audit committee members who fail to exercise adequate oversight may face Caremark claims alleging breach of the duty of loyalty through failure of oversight. Gurpreet Bal advises directors to ensure the company maintains adequate D&O insurance coverage with appropriate Side A coverage for individual directors, and to confirm that indemnification agreements are in place before accepting an audit committee position.
Private companies typically have informal financial oversight, often relying on a single CFO or controller without a formal audit committee structure. The transition to public company audit committee governance requires establishing a formal charter, implementing pre-approval policies for auditor services, creating whistleblower procedures, and developing a cadence of regular meetings with both management and the independent auditor in executive session. Gurpreet S. Bal works with pre-IPO companies to establish these structures during the IPO preparation process, typically beginning with a gap analysis of existing financial reporting and control frameworks against public company requirements.
In Gurpreet's experience, the audit committee is the most time-consuming committee role on most public company boards. Be fully committed before you accept it — not theoretically willing to commit, actually prepared for the cadence of work it requires. If you have never served on an audit committee before, spend at least a year as a member before taking on the chair role. The chair runs the process, sets the agenda, manages the auditor relationship, and is the person regulators and litigants look to first. That is not a role to learn on the job from scratch. And if your accounting background is not deep, make sure you have a trusted advisor or former colleague in the field who can walk you through the technical questions as they arise. You do not need to be a CPA. You do need to know when something does not look right and who to call.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on venture financings, M&A, IPOs, and corporate governance. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology. Gurpreet's recent IPO experience includes leading company representation in the only sub-$1 billion U.S. semiconductor IPO in recent years.