Under the rule, as adopted, to qualify as a financial expert the director must have five attributes:
These attributes may be acquired in one or more of four ways:
The final rule reflects criticism that the rule as originally proposed would only permit certified public accountants, who had previously audited public companies, as the sole group of persons that would qualify as a financial expert. In other words, not even Warren Buffet would qualify as a financial expert.
On the other hand, the final rule now allows the board to give equal credit for "analyzing or evaluating financial statements presenting accounting issues generally comparable in breadth and complexity." In short, a CEO who has actively participated in and contributed to the preparation of financial statements using GAAP would qualify. Also, prior experience sitting on an audit committee would be an important factor for a board to consider in whether or not someone qualifies as a financial expert. In any event, under this rule the company must disclose the basis for the board of director's determination that someone qualifies as a financial expert.
In addition to the overall requirements set forth by the SEC, each exchange has the right to set forth its own specific criteria for a financial expert that are not deemed inconsistent with the SEC's five attributes. Companies must comply with the audit committee financial expert disclosure requirements in their annual reports for fiscal years ending on or after July 15, 2003, except in the case of small business issuers, this requirement is for fiscal years ending on or after December 15, 2003.
The financial expert is required or expected to do more work than the other members of the audit committee, which, in turn, are expected to do more work than the other directors of the issuer. For this, the audit committee and financial expert are entitled to additional compensation. A recent Deloitte & Touche Audit Committee and Governance Survey indicates that the full audit committee, rather than just its chairperson, is now more involved in the review of the company's quarterly press release and 10-Q prior to issuance and filing, respectively.
What's in the works
The audit committee financial expert is essentially a brand new profession. There are persons who are needed to accept this very responsible position; however, one must initially satisfy the technical requirements to qualify for this position.
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CHARLES HECHT has been a principal of his own law firm specializing in securities law since 1971. He was previously on the staff of the Division of Corporate Finance of the Securities and Exchange Commission at its headquarters in Washington, DC. Mr. Hecht would appreciate any input on subject matters within the SEC accounting area which you believe would be appropriate for a future article.2003 SmartPros Ltd. All Rights Reserved.