Assignment 2 ACG6657
cayayal
2-3AuditCommitteeFinancialExpert.pptxAudit Committee Financial Expert Rule
SOX Section 407
… In this release, we adopt rules to implement the following two provisions of the Sarbanes-Oxley Act: Section 407, which directs us to adopt rules: (1) requiring a company to disclose whether its audit committee includes at least one member who is a financial expert; and (2) defining the term "financial expert"; …
What term to use for “expert”?
In the Proposing Release, we solicited comment as to whether we should use the term "financial expert" … or whether a different term such as "audit committee financial expert" would be more appropriate.
A number of commenters expressed a concern that neither the term "financial expert" nor "audit committee financial expert" accurately reflects the required experience and expertise of the type of expert contemplated by Section 407 …
One commenter therefore recommended that we use the term "audit committee accounting expert." Other suggested terms included "accounting expert," "audit committee member financial lead" and "financially proficient director."
“Audit Committee Financial Expert”
… We have decided to use the term "audit committee financial expert" in our rules implementing Section 407 instead of the term "financial expert.”
This term suggests more pointedly that the designated person has characteristics that are particularly relevant to the functions of the audit committee, such as: a thorough understanding of the audit committee's oversight role, expertise in accounting matters as well as understanding of financial statements, and the ability to ask the right questions to determine whether the company's financial statements are complete and accurate.
The new rules include a definition of the term "audit committee financial expert."
Opposition to naming experts
A substantial number of commenters opposed our proposal to require a company to disclose the number and names of the persons that the company's board determined to be audit committee financial experts. …
Much of the opposition stemmed from a fear that the designation of an audit committee financial expert may inappropriately suggest that the expert bears greater responsibility, and therefore is subject to a higher degree of liability, for audit committee decisions than other audit committee members.
Some commenters thought that identification of the audit committee financial expert in the company's annual report would exacerbate that problem and discourage qualified persons from serving as such experts.
AC Expert NOT mandatory! But disclosure is required
We have modified the proposals … . Under the rules that we are adopting, a company must disclose that its board of directors has determined that the company either: has at least one audit committee financial expert serving on its audit committee; or does not have an audit committee financial expert serving on its audit committee.
A company disclosing that it does not have an audit committee financial expert must explain why it does not have such an expert.
… under the final rules, if a company discloses that it has an audit committee financial expert, it also must disclose the expert's name. …
We believe that, in general, omission of the expert's name ultimately would not result in the expert's identity remaining non-public. To the extent that there are liability concerns, we believe that they are best addressed by our inclusion of a safe harbor in our rules, as discussed below.
The final rules permit, but do not require, a company to disclose that it has more than one audit committee financial expert on its audit committee. …
Furthermore, if the company's board determines that at least one of the audit committee members qualifies as an expert, the company must accurately disclose this fact. It will not be appropriate for a company to disclose that it does not have an audit committee financial expert if its board has determined that such an expert serves on the audit committee.
Initially Proposed Definition
a. Proposed Definition of the Term "Financial Expert"
(1) An understanding of GAAP and financial statements;
(2) Experience applying such GAAP in connection with the accounting for estimates, accruals, and reserves …;
(3) Experience preparing or auditing financial statements …;
(4) Experience with internal controls and procedures for financial reporting; and
(5) An understanding of audit committee functions.
“Too restrictive”
The proposed definition of the term "financial expert" proved to be the most controversial aspect of the proposals - more commenters remarked on it than on any other topic addressed by the proposed rules. Most of the commenters thought that the proposed definition was too restrictive.
Other objections
… Some of the corporate commenters were of the view that they already have exemplary audit committees, despite the fact that none of their current members would meet our proposed definition of an expert. A few complained that companies may have to sacrifice the diversity of their boards and nominate directors who satisfy the audit committee financial expert definition even if the company does not believe that these directors are best-suited for the position.
… several commenters debated the merits of defining an audit committee financial expert as a person with strong accounting credentials, given that an audit committee member's role is one of oversight, rather than direct involvement in the company's accounting functions, and suggested that the emphasis on technical accounting expertise in the definition was misplaced. .…
Final Definition
c. Final Definition of "Audit Committee Financial Expert“
An understanding of GAAP;
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 … 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
Acquiring expertise
Under the final rules, a person must have acquired such attributes through any one or more of the following:
(1) 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 the performance of similar functions;
(2) Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions;
(3) Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or
(4) Other relevant experience.
Changed definition of expert
Effective audit committee members must have both the ability and the determination to ask the right questions. Therefore, we have broadened this attribute to include persons with experience performing extensive financial statement analysis or evaluation.
We also are convinced by commenters that a potential audit committee financial expert should be considered to possess this attribute by virtue of his or her experience actively supervising a person who prepares, audits, analyzes or evaluates financial statements. …
Safe harbor for expert
… we are including a safe harbor in the new audit committee disclosure item to clarify that: …
The designation or identification of a person as an audit committee financial expert pursuant to the new disclosure item does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification;
