New Audit Committee Charter Requirements
By James H. Ball, Jr. and Alexander F. Kennedy

The Sarbanes-Oxley Act of 2002 requires the Securities and Exchange Commission to direct the national securities exchanges and associations to prohibit the listing of any security of any issuer not in compliance with the statute’s audit committee requirements. To comply with this directive, the New York Stock Exchange and the Nasdaq Stock Market proposed new listing rules to the SEC that impose new requirements on the audit committees of their listed companies¹. On November 4, 2003, the new listing rules were approved by the SEC². These NYSE and Nasdaq requirements must conform to SEC Rule 10A-3, which implements certain audit committee requirements mandated by Sarbanes-Oxley. ³

Listed issuers, other than foreign private issuers and small business issuers, must comply with the new listing rules by the earlier of their first annual shareholders meeting after January 15, 2004, and October 31, 2004. Foreign private issuers⁴ and small business issuers that are listed must comply with the new listing rules no later than July 31, 2005.

Boards of directors and audit committees should update audit committee charters to embody the new requirements. Set forth below are new requirements we recommend each issuer reflect in its audit committee charter. A model charter accompanies this article.

Audit Committee Purpose

More than ever before, the role of audit committees will be central to the modern financial reporting scheme. The audit committee should have a written charter that spells out the committee’s purpose. For Nasdaq-listed companies, that purpose must be to oversee the accounting and financial reporting of the company and its audits and financial statements. For NYSE-listed companies, the purpose of the committee, at a minimum, must be to assist the board of directors with oversight of:

• The integrity of the company’s financial statements;
• The company’s compliance with legal and regulatory requirements;
• The independent auditor’s qualifications and independence;
• The performance of the company’s internal auditors and independent auditor; and
• The preparation of the internal control report to be required by the SEC.

Audit Committee Member Independence

Audit committees must have at least three members. Each member must be a member of the company’s board of directors and must be independent, subject to certain exemptions (some of which are discussed below).

To be considered independent under Rule 10A-3(b)(1), an audit committee member of a listed company that is not an investment company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee:

• Accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the company or any of its subsidiaries; or
• Be an affiliated person of the company or any of its subsidiaries.

A member may be considered independent even if he or she receives fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service so long as this compensation is not contingent in any way on continued service.

Audit committee members may serve on both the audit committee of a listed company and on the audit committee or board of a company affiliate as long as each member meets the independence requirements with respect to each entity.

For Nasdaq-listed companies, no audit committee member may have participated in the preparation of the financial statements of the company or any current subsidiary of the company at any time during the past three years.

Under the NYSE definition of independent, the board must affirmatively determine that the director has no material relationship with the company. In addition, the following individuals would not be considered independent:

• A director who is an employee, or whose immediate family member is an executive officer, of the company;
• A director who receives, or whose immediate family member receives, more than $100,000 per year in direct compensation from the company (other than in the form of director or committee fees or pension or other deferred compensation for prior service);
• A director who is affiliated with or employed by, or whose immediate family member is affiliated with or employed in a professional capacity by, a present or former internal or independent auditor of the company;
• A director who is, or whose immediate family member is, an executive officer of another company if any of the listed company’s executives serve on the other company’s compensation committee; or
• A director who is an executive officer or an employee, or whose immediate family member is an executive officer, of a company that makes payments to, or receives payments from, the listed company for property or services in an amount that, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues.

During the first year after approval of these standards, each test has a one-year “look-back.” In other words, a director is not considered “independent” until at least one year after the disqualifying relationship or payments cease. Thereafter, each independence test will have a three year “look-back.”

For Nasdaq-listed companies, an “independent director” is a person who is not an officer or employee of the company or any of its subsidiaries and who does not have a relationship that, in the opinion of the board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In addition, the following individuals are not considered independent:

• A director who is, or during the past three years was, employed by the company or by any parent or subsidiary of the company;
• A director who accepts or who has a family member who accepts any payments from the company or any parent or subsidiary of the company in excess of $60,000 during the current fiscal year or any of the past three fiscal years, other than compensation for board or board committee service, payments arising solely from investments in the company’s securities, compensation paid to a family member who is a non-executive employee, benefits under a tax-qualified retirement plan, or non-discretionary compensation or loans permitted under Section 13(k) of the Securities Exchange Act of 1934;
• A director who is a family member of an individual who is, or at any time during the past three years was, an executive officer of the company or any parent or subsidiary of the company;
• A director who is, or has a family member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which the company made, or from which the company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more, other than payments arising solely from investments in the company’s securities or under non-discretionary charitable contribution matching programs;
• A director who is, or has a family member who is, an executive officer of another entity where at any time during the past three years any of the executive officers of the listed company served on the compensation committee of the other entity; or
• A director who is, or has a family member who is, a current partner of the company’s outside auditor, or was a partner or employee of the company’s outside auditor who worked on the company’s audit at any time during the past three years.

One member of a Nasdaq company’s audit committee need not be independent if the board has determined that this member’s participation on the committee is required in the best interests of the company and its shareholders and the member meets the criteria for independence set forth in SEC Rule 10A-3(b)(1) and is not a current officer or employee or an immediate family member of an officer or employee. A member appointed to the audit committee pursuant to this exception may not serve longer than two years and may not chair the committee.

There are several foreign issuer exemptions from the independence requirements. Some of the more significant ones are discussed below.

Employee representation. Certain countries, such as Austria and Germany, require that non-management employees, who would not otherwise be viewed as “independent” under U.S. requirements, serve on the supervisory board or audit committee. It is also common for collective bargaining or other employee agreements or the issuer’s governing documents to provide for non-executive representation on the supervisory board or audit committee. These employee members are exempt from the independence requirements of an audit committee member.

Controlling shareholder representation. In certain countries, including Canada, Spain, and Sweden, controlling shareholders or shareholder groups are common. One member of the audit committee of a foreign private issuer can be an affiliate (or a representative of an affiliate) of a foreign private issuer, if: the “no compensation” prong of the independence requirements is satisfied; the member has only observer status on, and is not a voting member or the chair of, the audit committee; and the member is not an executive officer of the foreign private issuer.

Foreign government representation. Foreign governments, including those in Latin and South American countries such as Chile, and European countries such as France, may have significant shareholdings in some foreign private issuers or may own special shares that entitle the government to exercise special rights. Due to their shareholdings or other rights, representatives of these governments may not be considered “independent” under the new requirements. Any audit committee member can be a representative or designee of a foreign government or governmental entity that is an affiliate of the private issuer if the “no compensation” prong of the independence requirements is satisfied and the member is not an executive officer of the foreign private issuer.

Listed issuers that are foreign governments. Foreign issuers that are themselves foreign governments are not subject to the new independence requirements.

Boards of auditors or similar bodies. Several countries, including Japan, Brazil, China, Italy, Russia, and Turkey, require or provide for auditor oversight through a board of auditors or similar body, or groups of statutory auditors. These boards of auditors or statutory auditors are intended to be separate from management, but their members may not in all cases meet the independence requirements. Under the new rules, the securities of a foreign private issuer will be exempt from all of the audit committee requirements if:

• The foreign private issuer has a board of auditors (or similar body), or has statutory auditors, established and selected pursuant to home country legal or listing provisions expressly requiring or permitting such a board or similar body;
• The board of auditors is required to be either separate from the board of directors, or composed of one or more members of the board of directors and one or more individuals who are not members of the board of directors;
• The board of auditors is not elected by management and no executive officer of the issuer is a member of the board of auditors;
• Home country legal or listing provisions provide standards for the independence of the board of auditors from the issuer or the issuer’s management;
• The board of auditors, in accordance with any applicable home country legal or listing requirements or the issuer’s governing documents, is responsible for the appointment, retention, and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review, or attest services for the issuer; and
• The complaint procedures, advisors, and funding requirements discussed below with respect to U.S. audit company audit committees apply to the board of auditors, to the extent permitted by law.

Dual holding companies. Dual holding companies are two non-U.S. companies that are organized in different national jurisdictions and whose business is jointly owning and supervising the management of one or more businesses that are conducted as a single economic enterprise and any activity incidental to that enterprise. These companies are not deemed affiliates of each other, including in cases where the same directors serve on the boards of both companies or of the businesses they jointly control (as long as the directors receive only ordinary course compensation for their service). Dual holding companies may designate one audit committee for both companies as long as each audit committee member is a director of at least one of the companies.

Financial Literacy

Under the NYSE rules, every member of the audit committee must be financially literate, or must become financially literate within a reasonable period of time after being appointed to the committee. At least one member of the audit committee must have accounting or related financial management expertise. The terms “financially literate” and “accounting or related financial management expertise” are to be interpreted by the board in its business judgment. Although the NYSE does not require an audit committee to include a person who satisfies the definition of “audit committee financial expert” set out in Item 401(h) of Regulation S-K, the board may presume that such a person has accounting or related financial management expertise. ⁵

For Nasdaq-listed companies, all members of the audit committee must be able to read and understand fundamental financial statements. In addition, at least one member of the committee must have past employment experience in finance or accounting, professional certification in accounting, or any other comparable experience or background that results in the member’s financial sophistication, including being or having been a CEO or CFO or other senior officer with financial oversight responsibilities. A director who qualifies as an audit committee financial expert under SEC rules is presumed to qualify as a financially sophisticated audit committee member.

An SEC reporting company is required to disclose in its annual report that the company’s board of directors has determined that it has at least one “audit committee financial expert” serving on its audit committee, or that it does not have such an expert.

Other Audit Committee Requirements

Sarbanes-Oxley imposes many new requirements on the audit committee.

Hiring and terms. The audit committee must directly appoint, retain, and compensate the independent auditor, subject to shareholder approval, and approve all audit engagement fees and terms and all significant non-audit engagements. At NYSE-listed companies, the audit committee also must evaluate and terminate (if appropriate) the auditor.

Oversight. The audit committee is directly responsible for overseeing the work of the independent auditor.

Approval of services. The audit committee must preapprove all auditing and non-auditing services of the independent auditor. However, under a de minimus exception, preapproval is not required for other than audit, review, or attest services if:

• The aggregate amount of all these services provided to the company constitutes not more than five percent of the total amount of revenues paid by the company to its independent auditor during the fiscal year in which the non-audit services are provided;
• The services were not recognized by the company at the time of the engagement to be non-audit services; and
• The services are promptly brought to the attention of the audit committee and approved prior to the completion of the audit by the audit committee or by one or more members of the committee to whom authority to grant these approvals has been delegated.

Alternatively, the engagement of the independent auditor may be entered into pursuant to pre-approved policies and procedures established by the audit committee, provided that the policies and procedures are detailed as to the particular services and the audit committee is informed of such service.

Independent advice; company funding. The audit committee must have authority and funding to engage independent legal, accounting, and other advisors as it deems necessary. The company also must pay the committee’s ordinary administrative expenses.

Charter. The audit committee must review and reassess the adequacy of its charter on an annual basis and submit proposed changes to the board for approval.

Audit partners. The audit committee must assure the regular rotation of the lead audit partner as required by Section 10A(j) of the Exchange Act. Section 10A(j) makes it unlawful for the independent auditor to provide audit services to the company if the lead (or coordinating) audit partner, or the partner responsible for reviewing the audit, has performed audit services for the company in each of the five previous fiscal years.

New hires. To ensure compliance with Section 10A(l) of the Exchange Act, the audit committee must set clear hiring policies for employees or former employees of the independent auditor. Section 10A(l) provides that it is unlawful for the independent auditor to perform for a company any audit service required by Section 10A if a chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for the company was employed by that independent auditor and participated in any capacity in the audit during the one-year period preceding initiation of the audit.

Audit-related communications. The audit committee must review and discuss reports from the independent auditor regarding:

• All critical accounting policies and practices to be used;
• All alternative treatments of financial information within generally accepted accounting principles that have been discussed with company management, ramifications of the use of these alternative disclosures and treatments, and the treatment preferred by the independent auditor; and
• Other material written communications between the independent auditor and management, such as any management letter or schedule of unadjusted differences.

Similarly, the audit committee must discuss with the independent auditor and then disclose the matters described in Statement of Auditing Standards No. 61, including any difficulties the independent auditor encountered in the course of the audit work, any restrictions on the scope of the auditor’s activities or on access to requested information, and any significant disagreements with management.

Disclosure. The audit committee must review the CEO and CFO’s disclosures and certifications under Sections 302 and 906 of Sarbanes-Oxley.

Respond to whistleblowers. The audit committee must establish procedures for the receipt, retention, and treatment of complaints regarding the company’s accounting, internal accounting controls, and auditing matters, and must facilitate the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

Other NYSE Audit Committee Requirements

The NYSE rules will impose many new requirements on the audit committee.

Multiple committee memberships. Audit committee members may not simultaneously serve on the audit committees of more than two other public companies unless the board has determined that simultaneous service will not impair the ability of the member to serve effectively and the board discloses this determination in the company’s annual proxy statement.

Meetings. The audit committee must meet periodically in separate, private sessions with management, the independent auditor, and the internal auditors. The audit committee may require any officer or employee of the company or the company’s outside counsel or external auditor to meet with the audit committee or its members or consultants and to provide pertinent information as necessary.

Board reports. The audit committee must report regularly to the full board.
Audit details. The audit committee must review with the independent auditor the responsibilities, budget, annual audit plan, and staffing of the company’s internal auditors and any recommended changes in the planned scope of the internal audit. The committee also must review significant audit findings and management’s response to those findings.

Quality control. The audit committee must obtain and review a report by the independent auditor, at least annually, describing:

• The independent auditor’s internal quality-control procedures;
• Any material issues raised by the most recent internal quality-control review, or peer review, of the independent auditor, or by an inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting any independent audit carried out by the auditor, and any steps taken to deal with these issues; and
• All relationships between the independent auditor and the company.

Evaluations. The audit committee must evaluate the qualifications, performance, and independence of the independent auditor and the lead audit partner, and present its conclusions regarding the auditor to the full board. The committee should consider the opinions of management and of the company’s internal auditors in making this evaluation.

Rotation. The audit committee must consider whether, in order to assure continuing auditor independence, there should be regular rotation of the independent auditor.

Follow-up. The audit committee must review with the national office of the independent auditor any audit problems or difficulties and management’s response to those problems.

Disclosure. The audit committee must review and discuss the annual audited financial statements and quarterly financial statements with management and the independent auditor, including disclosures in the MD&A and disclosures regarding critical accounting estimates. The committee also must discuss with management the company’s earnings press releases, as well as financial information and earnings guidance provided to analysts and rating agencies.

Ongoing communications. The audit committee must review and discuss with management and the independent auditor the following:

• Major issues regarding accounting principles and financial statement presentations, and major issues as to the adequacy of the company’s internal controls and any special audit steps adopted in light of material control deficiencies;
• Analyses prepared by management and/or the independent auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements; and
• The effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the company.

Risk management. Although the audit committee should not be the sole body responsible for risk assessment and management, the committee must discuss with management the company’s major financial risk exposures, the steps management has taken to monitor and control these exposures, and guidelines and policies to govern the process by which risk assessment and management is undertaken.

Compliance. The audit committee must discuss with the company’s general counsel any legal, compliance, or regulatory issues that could have a material effect on the company’s financial statements or compliance policies.

Self-evaluation. The audit committee must annually evaluate its own effectiveness.

Other Nasdaq Audit Committee Requirements

The Nasdaq has not significantly expanded on the additional requirements that Sarbanes-Oxley imposes on audit committees. Nasdaq’s rules add two requirements: convene twice yearly meetings in executive session and review and approve all related party transactions.

[SIDEBAR]

Model Audit Committee Charter

This model charter should be tailored to the company’s culture, past practices, organization structure, the exchange on which the company is listed, and the jurisdiction in which it is organized. A paragraph preceded by a bracketed reference to “NYSE” or “Nasdaq” applies only to companies listed on the referenced exchange. Other paragraphs apply to all companies covered by Sarbanes-Oxley.

As discussed in footnote 3 to the accompanying article, both the NYSE and Nasdaq permit foreign private issuers to follow their home country practices with respect to certain governance matters. We designate these requirements with an asterisk below.

Purpose

[NYSE] The purpose of the Audit Committee is to assist the Board of Directors in overseeing: (1) the integrity of the Company’s financial statements, (2) the Company’s compliance with legal and regulatory requirements, (3) the independent auditor’s qualifications and independence, (4) the performance of the Company’s internal auditors and independent auditor, and (5) the preparation of the internal control report to be required by the Securities and Exchange Commission.*

[Nasdaq] The purpose of the Committee is to oversee the processes of accounting and financial reporting of the Company and the audits and financial statements of the Company.

Committee Structure

The Committee shall consist of at least three directors.* Each member of the Committee shall meet the independence and experience requirements of the New York Stock Exchange or Nasdaq Stock Market,* as appropriate, Section 10A(m)(3) of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules and regulations of the Securities and Exchange Commission. The Board may, at any time and in its complete discretion, replace a Committee member.

[NYSE] Members of the Committee shall not simultaneously serve on the audit committees of more than two other public companies unless the Board determines that simultaneous service would not impair the ability of the member to effectively serve on the Committee and the Board discloses this determination in the Company’s annual proxy statement.*

Meetings

[NYSE] The Committee shall meet as often as necessary.* The Committee shall meet periodically in separate, private sessions with management, the independent auditor and the internal auditors to discuss anything the Committee or these groups believe should be discussed.* The Committee may require any Company officer or employee or the Company’s outside counsel or external auditor to attend a Committee meeting or to meet with any members of, or consultants to, the Committee, and to provide pertinent information as necessary.

[Nasdaq] The Committee shall meet in executive session at least twice a year.*

The Committee shall maintain minutes and other relevant documentation of all its meetings.

Committee Authority and Responsibilities

The Committee shall directly appoint, retain, compensate, [and at NYSE companies, evaluate and terminate] the Company’s independent auditor, subject to shareholder approval. The Committee has the sole authority to approve all audit engagement fees and terms, as well as all significant non-audit engagements with the independent auditor. The Committee shall be directly responsible for overseeing the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work, and the independent auditor shall report directly to the Committee.

The Committee shall preapprove all auditing and non-auditing services of the independent auditor, subject to de minimus exceptions for other than audit, review, or attest services that are approved by the Committee prior to completion of the audit. Alternatively, the engagement of the independent auditor may be entered into pursuant to pre-approved policies and procedures established by the Committee, provided that the policies and procedures are detailed as to the particular services and the Committee is informed of each service.

The Committee shall have the authority to engage, without Board approval, independent legal, accounting, and other advisors as it deems necessary to carry out its duties. The Company shall provide appropriate funding, as determined by the Committee, to compensate the independent auditor, outside legal counsel, or any other advisors employed by the Committee, and to pay ordinary Committee administrative expenses that are necessary and appropriate in carrying out its duties.

[NYSE] The Committee shall report regularly to the full Board, including regarding the performance of the Company’s internal audit function.* The Committee shall annually evaluate its own effectiveness.*

The Committee shall review and reassess the adequacy of this Charter on an annual basis and submit proposed changes to the Board for approval.* The Committee has the powers and responsibilities delineated in this Charter. It is not, however, the Committee’s responsibility to prepare and certify the Company’s financial statements, to guaranty the independent auditor’s report, or to guaranty other disclosures by the Company. These are the fundamental responsibilities of management and the independent auditor. Committee members are not full-time Company employees and are not performing the functions of auditors or accountants.

Oversight of the Company’s Internal Auditors

[NYSE] The Committee shall advise the director of the internal auditing department that the department is expected to provide to the Committee summaries of and, as appropriate, copies of its significant reports to management and management’s responses thereto.*

[NYSE] The Committee shall review with the independent auditor the responsibilities, budget, annual audit plan, and staffing of the Company’s internal auditors;* review any recommended changes in the planned scope of the internal audit; and review significant audit findings and management’s response.*

Oversight of Company’s Independent Auditor

[NYSE] The independent auditors for the Company are accountable to the Board and the Committee, as representatives of the shareholders, and the Committee shall instruct the independent auditors to that effect.*

[NYSE] The Committee shall discuss the scope of the annual audit with management and the independent auditors.*

[NYSE] The Committee shall obtain and review a report by the independent auditor, at least annually, describing: (1) the independent auditor’s quality-control procedures; (2) any material issues raised by the most recent quality-control review, or peer review, of the independent auditor, or by an inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the independent auditor, and any steps taken to deal with these issues; and (3) all relationships between the independent auditor and the Company, including each non-audit service provided to the Company and the matters set forth in Independent Standards Board Standard No. 1 (Independent Discussions with Audit Committees).* The Committee shall review and evaluate the qualifications, performance, and independence of the independent auditor and of the lead audit partner of the independent auditor, and present its conclusions with respect to the independent auditor to the full Board not less than annually.*

The Committee shall assure the regular rotation of the lead audit partner as required by Section 10A(j) of the Exchange Act[, and, at NYSE companies, consider whether, to assure continuing auditor independence, there should be regular rotation of the independent auditing firm itself].*

The Committee shall set clear hiring policies for employees or former employees of the independent auditor that are consistent with Section 10A(l) of the Exchange Act.

[NYSE] The Committee shall review with the national office of the independent auditor any audit problems or difficulties and management’s response.*

Disclosure and Financial Statements

[NYSE] The Committee shall review and discuss the annual audited financial statements and quarterly financial statements with management and the independent auditor, including disclosures under management’s discussion and analysis and disclosures regarding critical accounting estimates, and then disclose that this review and discussion occurred and whether the Committee recommended to the Board that the audited financial statements be included in the Company’s annual report on Form 10-K.*

[NYSE] The Committee shall review and discuss with management and the independent auditor: (1) major issues regarding accounting principles and financial statement presentations, including significant changes in the Company’s selection or application of accounting principles, and major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies; (2) analyses prepared by management and/or the independent auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements; and (3) the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the Company’s financial statements.*

[NYSE] Discuss with management the type and presentation of information to be included in the Company’s earnings press releases (paying particular attention to any use of “pro forma” or “adjusted” non-GAAP, information), as well as financial information and earnings guidance provided to analysts and rating agencies.* The discussion may be done generally (i.e., discussion of the types of information to be disclosed and the type of presentation to be made).

The Committee shall obtain, review and discuss reports from the independent auditor regarding: (1) all critical accounting policies and practices to be used; (2) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the Company, ramifications of the use of these alternative disclosures and treatments, and the treatment preferred by the independent auditor and the reasons for favoring that treatment; and (3) other material written communications between the independent auditor and Company management, such as any management letter or schedule of unadjusted differences.

[NYSE] The Committee shall discuss with management the Company’s major financial risk exposures and the steps management has taken to monitor and control those exposures. The Committee also shall discuss with management the guidelines and policies to govern the process by which risk assessment and management is undertaken.*

The Committee shall discuss with the independent auditor and then disclose the matters required to be discussed and disclosed by SAS 61, including any difficulties the independent auditor encountered in the course of the audit work, any restrictions on the scope of the independent auditor’s activities or on access to requested information, and any significant disagreements with management.

The Committee shall review the CEO and CFO’s disclosure and certifications under Sections 302 and 906 of the Sarbanes-Oxley Act.

Compliance and Regulatory Oversight Responsibilities

[Nasdaq] The Committee shall review and approve all related party transactions.

The Committee shall establish procedures for the receipt, retention, and treatment of complaints received by the Company from its employees regarding accounting, internal accounting controls, and auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

The Committee shall ascertain annually from the independent auditor whether the Company has issues under Section 10A(b) of the Exchange Act.
[NYSE] The Committee shall discuss with the Company’s General Counsel any legal, compliance, or regulatory issues that could have a material effect on the Company’s financial statements or compliance policies.*

The Committee shall review with management and the independent auditor any correspondence with regulators and any published reports that raise material issues regarding the Company’s accounting policies.*

Notes

1. See File No. SR-NYSE-2002-33 (Aug. 16, 2002), available at <www.nyse.com/pdfs/corp_gov_pro_b.pdf>; File No. SR-NYSE-2002-33, Amendment No. 1 (Apr. 4, 2003), available at <www.nyse.com/pdfs/amend1-04-09-03.pdf>; File No. SR-NYSE-2002-33, Amendment No. 2 (Oct. 8, 2003), available at <www.nyse.com/pdfs/amend2-10-08-03.pdf>; File No. SR-NYSE-2002-33, Amendment No. 3 (Oct. 20, 2003), available at <www.nyse.com/pdfs/2002-33Am3.pdf>; File No. SR-NASD-2002-141 (Oct. 9, 2002), available at <www.nasdaq.com/about/2002_141.pdf>; File No. SR-NASD-2002-141, Amendment No. 1 (Mar. 11, 2003), available at <www.nasdaq.com/about/SR-NASD-2002-141_Amendment_1.pdf>; File No. SR-NASD-2002-141, Amendment No. 2. (Jul. 16, 2003), available at <www.nasdaq.com/about/SR-NASD-2002-141_Amendment_2.pdf>; File No. SR-NASD-2002-141, Amendment No. 3. (Oct. 10, 2003), available at <www.nasdaq.com/about/SR-NASD-2002-141_Amendment_3.pdf>; File No. SR-NASD-2002-141, Amendment No. 4 (Oct. 16, 2003); File No. SR-NASD-2002-141, Amendment No. 5 (Oct. 30, 2003).

2. NASD and NYSE Rulemaking: Relating to Corporate Governance, Release No. 34-48745 (Nov. 4, 2003), available at <www.sec.gov/rules/sro/34-48745.htm>.

3. Standards Relating to Listed Company Audit Committees, Release No. 33-8220 (Apr. 9, 2003), available at <www.sec.gov/rules/final/33-8220.htm>.

4. NYSE rules permit non-U.S. issuers to follow home-country practice with respect to corporate governance requirements. Therefore, non-U.S. issuers may obtain exemptions from NYSE audit committee listing standards not required by Exchange Act Rule 10A-3. The NYSE rules require a non-U.S. issuer to provide in its annual report or on its Web site a brief summary of any significant differences between its home-country corporate governance practices and NYSE rules for U.S. companies.

Nasdaq rules provide that Nasdaq may grant exemptions from the corporate governance requirements to ensure that no non-U.S. issuer is required to act in a manner contrary to law, rule, or regulation of any public authority exercising jurisdiction over that issuer’s country of domicile. Nasdaq requires non-U.S. issuers to disclose in their annual report each requirement from which they are exempted and describe any alternative practice.

5. Under Item 401, an “audit committee financial expert” has the following attributes: (1) an understanding of generally accepted accounting principles and financial statements; (2) the ability to assess the general application of those principles in connection with the accounting for estimates, accruals, and reserves; (3) experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the company’s financial statements, or experience actively supervising one or more persons engaged in these activities; (4) an understanding of internal controls and procedures for financial reporting; and (5) an understanding of audit committee functions.

About the Author

James H. Ball, Jr. (jball@milbank.com) is a partner, and Alexander F. Kennedy (akennedy@milbank.com) is an associate, at Milbank, Tweed, Hadley & McCloy LLP in New York. The views expressed in this article are those of the authors and do not necessarily reflect the views of the firm. This article is not intended, nor may it be relied upon, as legal advice. Portions of this article may have appeared, or may in the future appear, in other publications. The authors gratefully acknowledge the contribution to this article of Amanda Kosonen, a Milbank summer associate.