SEC Ruling Creates Demand for "Financial Experts" on Corporate Boards

SEC Ruling Creates Demand for "Financial Experts" on Corporate Boards

4/28/2003
As required by the Sarbanes-Oxley Act, the SEC has recently issued a final rule, effective March 3, 2003, requiring publicly owned companies to disclose whether or not their audit committees have at least one member who is an "audit committee financial expert." The final rule adopted a more expansive definition of an "audit committee financial expert" than the definition set forth in the proposed rule. Under the final rule, although public companies are not required to have a financial expert on their audit committee, they must publicly disclose whether or not this is the case. If a company does have a financial expert on its audit committee, it must provide the individual's name and indicate whether such a person is independent of management. If a company does not have a financial expert on its audit committee, it must explain why it does not have such an expert. Consequently, executive search firms have reported a recent increase in demand for candidates that satisfy the qualifications stipulated by the SEC for "financial experts" The definition of an "audit committee financial expert" focuses on substantive attributes of an individual, together with the manner such an individual obtained the required experience. In order to qualify as an "audit committee financial expert" under the final SEC rules, a person must have all of 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; • An understanding of internal controls and procedures for financial reporting; and • An understanding of audit committee functions. The foregoing knowledge and experience can be acquired by the following means: • Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor. • Experience actively supervising a principal financial officer, principal accounting officer, controller, public Accountant, or auditor. • Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation auditing or evaluation of financial statements. • Other relevant experience, acquired through the product of experience. An individual who has obtained general expertise in financial accounting issues, such as a company CEO, by virtue of actively supervising a CFO should be able to qualify as an audit committee financial expert. Individuals with prior experience as investment bankers and financial analysts should also be able to qualify as audit committee financial experts. For more information on the significance of the new SEC "financial expert" ruling and its likely impact on corporate boards of directors, please contact J. Bryan Williams, a Member in Dickinson Wright's Bloomfield Hills office.
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