Sarbanes-Oxley General Requirement
Under Sarbanes-Oxley, the Company is required to state in its Form 20-F whether its board of directors has determined that either:
it has at least one “audit committee financial expert” on its audit committee (or on its board of auditors or statutory auditors, as the case may be); or
it does not have an audit committee financial expert member serving on its audit committee and the reasons why it does not have such an expert.
The Company must name the designated financial expert in the Form 20-F and whether he or she is independent. The names of additional experts are encouraged but not required to be disclosed. However, simply disclosing the qualifications of all audit committee (or board) members will not satisfy the rule.
Qualifications. Under Sarbanes-Oxley, the designated “audit committee financial expert” must have each of
the following attributes:
an understanding of financial statements and of the GAAP used by the Company to prepare its primary financial statements (need not be US 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 that present a breadth and level of complexity of accounting issues generally comparable to what can reasonably be expected to be raised by the Company’s 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.
The designated financial expert must have acquired these attributes through one or more of the following: education and experience as a principal financial officer, principal accounting officer, controller, public
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functions, although such experience need not have been in the same industry as the Company, or necessarily with an SEC reporting company;
experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions. While “active supervision” does not mean direct experience in preparing or auditing financial statements, it means more than seniority in a traditional reporting hierarchy and should involve active participation at a supervisory level. The supervisor’s experience should be at least comparable to the general expertise of those supervised. Thus, for instance, a CEO with considerable operations involvement but little financial or accounting involvement would not qualify under this experience requirement;
experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or
other relevant experience, which must be disclosed in the Form 20-F.
The important thing to take from this list of qualifications is that prior service as an accountant, auditor or financial officer is not essential for the designation. Thus, for instance, people such as investment bankers, venture capitalists, professional financial analysts, lawyers, fund managers or academics can serve as designated financial experts, as long as they have held positions requiring them to scrutinize financial statements and diligently question management and auditors.
Designation process. The Company’s full board (or full supervisory or non-management board, as the case
may be) is required to make the determination that someone qualifies as an “audit committee financial expert.” The determination should be made based on all the facts and circumstances and, in particular, should ensure that the designated expert embodies the highest standards of personal and professional integrity (e.g., candidates that have been the subject of disciplinary proceedings should be strictly scrutinized). The Company should begin the process by assessing the qualifications of current board members and by revising its directors and officers questionnaire to address these considerations.
Safe harbor. The SEC has clarified the following in response to concerns that mere designation as an audit
committee financial expert might be viewed as imposing a higher degree of individual responsibility on that person, or as decreasing the duties and obligations of other audit committee members:
an audit committee financial expert will not be deemed an “expert” for purposes of liability under the Securities Act;
the designation of a person as an audit committee financial expert does not impose any duties, obligations or liabilities greater than those imposed on an audit committee member in the absence of such designation; and
the designation of a person as an audit committee financial expert does not affect the duties, obligations or liability of any other audit committee or board member.
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NASDAQ (discretionary for non-US companies)
The NASDAQ standards require all audit committee members, at the time of their appointment, to be able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement.
A company must certify that it has and will continue to have at least one member of the audit committee who has past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual being financially sophisticated, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.