Financial experts on audit committees -- an overdue implementation.

AuthorLivingston, Phil
PositionPresident's Page

The SEC has issued proposed implementation rules for Section 407 of the Sarbanes-Oxley Act of 2002

("The Act"). That section was initiated and authored by FEI pursuant to Recommendation 9 of our March 2002 initiative, "FEI Observations and Recommendations -- Improving Financial Management, Financial Reporting and Corporate Governance."

The title of Recommendation 9 bluntly states both the purpose and background of the recommendation: "Effective Implementation of the 1999 Blue Ribbon Panel Recommendations Re: Audit Committee Financial Experts." In 1999, the Blue Ribbon Panel on Audit Committee Effectiveness called for all audit committee members to be financially literate and for each committee to have at least one financial expert.

The formation of the important 1999 panel reflected the importance of reforming audit committee effectiveness. It correctly anticipated the failures at Enron, WorldCom and Tyco. The Blue Ribbon Panel was sponsored by the SEC, NYSE and Nasdaq and was loaded with luminaries from corporations, distinguished lawyers and securities industry leaders. Its recommendations were numerous and thoughtful.

But post-Enron, it was apparent that the goal of improving audit committee effectiveness was unmet. For too many years, audit committees perceived their job as getting a report on the annual audit and trying to lower audit fees. Audit committee meetings were overly form-driven, perfunctory and painful for directors.

The Blue Ribbon Panel sought to solve part of the problem by getting at least one true financial expert on every audit committee, and by requiring all audit committee members be financially literate. But the definitions of "financial expert" were weak and broad. The NYSE left it to the company to define. Thus, little real reform happened in the two years leading up to Enron's collapse, and few companies actually changed the composition of their audit committees.

Hence, the FEI recommendation and Section 407 of the Act requiring disclosure as to the existence of an audit committee member having financial management and financial reporting experience and expertise. More checklists are not the answer; audit committee reform demands additional skill sets and resources.

None of this implies that existing audit committee members can't be terrific contributors. Experienced general managers, investment bankers, academics and venture capitalists can ask tough questions and assess risks as well as anyone. But financial...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT