Consider this problem:
You are a practicing attorney and a member of the audit committee for a large, publicly held corporation, XYZ. One evening, you receive a telephone call from the chief financial officer of XYZ, and she sounds quite distressed. She explains that she has discovered that the corporation has been materially overstating its assets for the last three quarters. As a result, XYZ has published misleading information in its recent annual financial report. She warns you that this will result in a Securities and Exchange Commission (SEC) investigation, as well as shareholder class action lawsuits.
After the initial shock disappears, you start thinking about the possibility that you will be subject to liability because of your position on the audit committee. You think back over the last year and remember when you were asked to become a member of the audit committee. The company chose you to serve on the committee because of your accounting background (you have an undergraduate degree in accounting) and your status as an outside director. You knew that the job would include more responsibilities than you already had, but you were ready to accept the challenge. As you understood, it would be your duty to monitor the internal financial reporting process as well as to communicate with the external auditors.