Coleman D. Ross
Securities and Exchange Commission
and New York Stock Exchange
Audit Committee Requirements
Background
Following the passage of the Sarbanes-Oxley Act of 2003, the 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.
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”.
Personal Attributes
Through my education, my professional experience, and the professional designations that I have achieved – as a certified public accountant, audit firm partner, public company chief financial officer, audit committee chairman, certified internal auditor, certified management accountant, and member of the AICPA’s senior accounting technical committee – I have acquired and continue to have these 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, 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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