In the 15 years since the Sarbanes-Oxley Act of 2002 (SOX) was passed, large institutional investors have been "finding their voice" and sharing their views of board expectations with regard to composition, accountability and transparency.
One of the most important aspects of the legislation was that it added additional requirements for the audit committee--the board's financial-oversight lynchpin--in an effort to strengthen it.
SOX required an annual disclosure of whether or not the board of directors had at least one audit committee financial expert (ACFE) on its audit committee, and if so, the expert's name and whether or not they were independent of management.
Part of the reasoning underlying this new disclosure requirement was that someone who possessed the skills and experience to be qualified as an ACFE, would ask more challenging questions and, as a result, more effective financial oversight would occur.
SOX was specific as to the skill sets the designated ACFE should possess, and also how the ACFE acquired these skill sets. [See Box.]
While there has largely been consensus that individuals who possess deep accounting, auditing, or corporate finance expertise have the skill sets to qualify, there has been disagreement and confusion over whether or not an individual is qualified to be designated as an ACFE if she or he held a supervisory role over someone with these skill sets.
Investors may differ as to which particular ACFE skill sets they want to see on the audit committee. However, are companies missing an opportunity to make the ACFE disclosure more transparent and easy to understand for investors?
Our exclusive review of the 2017 proxy statements of the Fortune 100 companies found the disclosure determining why an ACFE qualified was largely lacking.
Here is what we found:
It was a difficult and time consuming task to determine the reason why an audit committee member qualified as an ACFE because very few companies have voluntarily disclosed this information within the language of the actual ACFE designation disclosure. Five companies that did disclose the ACFE qualifications within the context of the actual ACFE designation were The Travelers Companies, Inc., Johnson & Johnson, Marathon Petroleum Corporation, Best Buy and Target Corporation. Their disclosures were transparent and easy to follow because all of the information was contained in one place in the proxy statement. Such disclosures enable an investor to easily...