Coleman D. Ross

United States and United Kingdom
Audit Committee Requirements

Background

NYSE logoSEC logoFollowing the enactment of the Sarbanes-Oxley Act of 2003, the U.S. Securities and Exchange Commission imposed a requirement on public company registrants to disclose whether or not one of the members of the board of directors was an “Audit Committee Financial Expert.” The New York Stock Exchange also added requirements for its listed companies that at least one audit committee member must have accounting or related financial management expertise and that all audit committee members must be financially literate or become financially literate after their appointment to the audit committee. The SEC requirement and definition for such a board member were first included in its Release Nos. 33-8177 and 34-47235, in January 2003, and are now reflected in the SEC’s Regulation S-K, Item 401(h) and set forth below.

FSA logoLondon Stock Exchange logoFRC logoIn the U.K., the Financial Services Authority requires that at least one member of the audit committee must have competence in accounting and/or auditing (Rule DTR 7.1.1 R). Further, the U.K. Financial Reporting Council’s Combined Code, which is applicable to London Stock Exchange-listed companies, states that the board should satisfy itself that it least one member of the audit committee has recent and relevant financial experience (Provision C.3.1). The Financial Reporting Council’s Guidance on Audit Committees goes further to state, "It is desirable that the committee member whom the board considers to have recent and relevant financial experience should have a professional qualification from one of the professional accounting bodies." (Paragraph 2.16).

Audit Committee Financial Expert Requirements

The SEC defines an “Audit Committee Financial Expert” as a person who has the following attributes:

  • An understanding of generally accepted accounting principles and financial statements;
  • The ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves;
  • Experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of issues that are generally comparable to the breadth and complexity of issues expected to be raised by the registrant’s financial statements, or experience actively supervising one or more persons engaged in such activities;
  • An understanding of internal controls and procedures for financial reporting; and
  • An understanding of audit committee functions.

The SEC goes on to state that a person must have acquired such attributes through any one or more of the following:

  • Education and experience as a principal financial officer, principal accounting officer, controller, public accountant, or auditor or experience in one or more positions that involve performance of similar functions;
  • Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor, or person performing similar functions;
  • Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing, or evaluation of financial statements; or
  • Other relevant experience.

The New York Stock Exchange does not define “accounting or related financial management expertise” or “financially literate” and, instead, leaves the determination up to the listed company’s board of directors. However, the New York Stock Exchange states that a listed company’s board of directors may presume that an Audit Committee Financial Expert, as defined by the SEC, has “accounting or related financial management expertise”.

While the U.K. requirements do not define “competence in accounting and/or auditing” or “recent and relevant financial experience”, one could look to the SEC’s definition of Audit Committee Financial Expert for indications of competence in accounting and/or auditing and financial experience.

Personal Attributes

Through my education (in accounting at an undergraduate level and economics at a graduate level), my professional experience (as an audit firm partner, chief financial officer, audit committee chairman, and member of the AICPA’s senior accounting technical committee), and the professional qualifications and designations that I have achieved (as a certified public accountant, as well as a certified management accountant and a certified internal auditor), I have acquired and continue to have these attributes that are relevant to the insurance and financial services industries:

  • An understanding of generally accepted accounting principles and financial statements;
  • The ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves;
  • Experience preparing, auditing, analyzing, and evaluating financial statements that present a breadth and level of complexity of issues, as well as experience actively supervising one or more persons engaged in such activities;
  • An understanding of internal controls and procedures for financial reporting; and
  • An understanding of audit committee functions.

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