We deal here with one of the more challenging provisions of the Sarbanes-Oxley Act of 2002, referred to by some as “SarbOx.” Specifically, section 407 of that Act requires public companies to disclose in their annual reports to the Securities and Exchange Commission, pursuant to an implementing SEC regulation, whether their audit committees include a financial expert–and if not, why not.
SarbOx spells out a complex schema for a financial expert’s qualifications. According to the statute, an expert is expected to have (1) an understanding of (i) generally accepted accounting principles (GAAP), (ii) financial statements, and (iii) audit committee functions, and (2) experience with (i) internal accounting controls, (ii) the preparation or auditing of “generally comparable” issuers’ financial statements, and (iii) applying GAAP to accounting for estimates, accruals and reserves.
A draft SEC regulation implementing this SarbOx provision was put out for comment in October of 2002, while the final rule was adopted in January and became effective in July of 2003. In response to a flood tide of comments on the rule proposal, some ameliorating adjustments were made in the final rule. For example, the “financial expert” term was repositioned as “audit committee financial expert”–ACFE, or “ack-fee”–to distinguish it from the long-familiar expertise concepts embedded in securities regulation.
See full Article.
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