Overview of regulations and requirements – Most audit committee charters include composition requirements. The Sarbanes-Oxley Act and the NYSE and NASDAQ listing rules require that all audit committees consist of at least three members and that all members be independent.
Independence is an important attribute for audit committees to perform an objective assessment of management and the financial statements and related audit reports, and should be reviewed continuously. Although all committee members must be financially literate, the NYSE and NASDAQ rules require at least one member to have accounting or financial management expertise. The SEC does not require one member to be an audit committee financial expert, but requires disclosure of whether there is one, and if so, the individual’s name. If there is no expert, the company must disclose this and explain why.
The NYSE listing standards require board education to be addressed in
the company’s corporate governance guidelines. Boards and audit
committees should use a needs-based approach to determine the
specific topics in a continuing education program.
Given the enhanced focus on the responsibilities of boards and audit
committees, continuing education for directors is an area of increasing
importance. According to the 2011 Board Practices Report, 71 percent
of boards receive in-house training from management, 60 percent of
directors are reimbursed for attending public forums or peer group
sessions, and 21 percent receive in-house education from a third party.
Public forums on corporate governance are offered by many
professional services firms, universities, and not-for-profit organizations.
Benefits include the opportunity to meet with peers and share
experiences, and these programs can be invaluable for gaining
knowledge from experts on trends in corporate governance. However,
boards should be careful not to rely completely on public programs
designed for a broad audience, because they may not address the
dynamics of a specific company and its industry. An increasingly
popular option is a customized program of continuing education. When
designing such a program, the board should identify risks and complex
issues facing the organization.
For the audit committee, the focus is more specific, centered on its role
to exercise primary oversight of the independent auditor relationship
and management’s financial reporting process. Training activities often
cover financial reporting and accounting issues important to the
company, such as critical accounting policies, regulatory mandates, and
internal controls. Self-assessment tools, such as Deloitte’s assessment
tools, help to identify specific areas for educational focus.
In addition to continuing education, the company should consider
orientation programs for new directors and audit committee members.
Materials may include information on the company’s history and
operations, corporate governance, regulatory matters, recent SEC
filings, industry trends, accounting policies and practices, company
policies and the code of ethics, and major business and financial risks.
According to the 2011 Board Practices Report, 74 percent of
respondents noted they had formal onboarding education training, and
99 percent of those respondents said the onboarding process was a
live, in-house session led by an individual on the board or a staff
member of the organization.
Entire Brief –