The interpretations expressed in this article are those of the author and do not necessarily represent the views of Schiff Hardin & Waite or any of its clients. The author is grateful to his colleagues who have prepared client materials addressing the legal and regulatory requirements summarized here.

This series of FAQs focuses on the role of audit committees of publicly held companies organized in the United States. Special rules for foreign private issuers and for registered investment companies are not addressed here. There is discussion of the SEC's auditor independence rules in this material only to the extent that they are germane to an understanding of the role and responsibilities of an audit committee.

These FAQs reflect the SEC-mandated changes to the rules of a national securities exchange and national securities association ("SROs") that pertain to audit committees, as required by Rule 10A-3 promulgated in Securities Act Release 8220 (Apr. 9, 2003), 68 F.R. 18787. . Specific reference is made to the rules of the New York Stock Exchange ("NYSE") in Section 303A of the NYSE Listed Company Manual and the Rule 4000 series of The Nasdaq Stock Market Inc. ("Nasdaq"), as approved by the SEC in Securities Exchange Act Release 48745 (Nov. 4, 2003), 68 F.R. 64154. Some of the exceptions to those rules and the transitional periods are not addressed in these FAQs. Any pertinent exceptions are generally found in the cited source for each FAQ.

While the audit committee rules of SROs that are mandated by Rule 10A-3 apply only to companies whose securities are listed on the SROs, best practices suggest that issuers whose securities are not so listed give serious consideration to voluntary compliance with SRO standards for audit committees.

The disclosure requirements in Rule 10A-3 and related provisions of Regulation S-K and Schedule 14A and SRO rules must be complied with beginning with reports for periods ending on or after, or proxy statements for actions occurring on or after, the compliance date for the listing standards applicable to the issuer. For listed issuers other than foreign private issuers and small business issuers the compliance date for both the SEC rules and SRO rules is the earlier of the first annual shareholders meeting after January 15, 2004 or October 31, 2004. Certain execeptions can be found in the cited sources.

The principal sources cited in this article are:

SEC Regulation S-X, 17 C.F.R. Part 210

SEC Regulation S-K, 17 C.F.R. Part 229

Securities Act Release 8177 (Jan. 23, 2003), 68 F.R. 5110
as corrected at Release 8177A (Mar. 26, 2003), 68 F.R. 15353

Securities Act Release 8183 (Jan. 28, 2003), 68 F.R. 6005,
as corrected at Release 8183A (Mar. 26, 2003), 68 F.R.15354).

Securities Act Release 8185 (Jan. 29, 2003), 68 F.R. 6324

Exchange Act Release 47890 (May 20, 2003), 68 F.R. 31819

Exchange Act Release 48745 (Nov. 4, 2003), 68 F.R. 64154

Final NYSE Corporate Governance Rules (Nov. 4, 2003) (www.nyse.com/pdfs/finalcorpgovrules.pdf) The rules referred to here are also found in the NYSE Listed Company Manual

The Nasdaq Stock Market, Inc. Corporate Governance Rules 4200, 4350, and 4360 and associated Interpretative Material (Dec. 1, 2003)

Office of the Chief Accountant [of the SEC]: Application of the January 2003 Rules on Auditor Independence Frequently Asked Questions (Aug. 8, 2003) (“SEC FAQ Aug. 2003”)

The Basic Nature of an Audit Committee and Related Disclosures

What is an audit committee?
Is a public corporation required to have an audit committee?
Under the federal securities laws, what body is treated as the "audit committee" if the issuer has not appointed specific members of the board of directors to be the audit committee?
What person or body serves as the audit committee if an issuer does not have a board of directors?
What disclosures must be made regarding an audit committee?
Are any certifications required with regard to the audit committee itself?

The Membership and Composition of an Audit Committee

What relationships can a member of the audit committee have with the issuer?
Who may be a member of the audit committee of a company who shares are listed on an SRO?
Is there a required minimum number of members of an audit committee for an SRO-listed company?
Are members of the audit committee of an SRO-listed company required to have any special qualifications, in addition to being independent, such as financial competence?
Is there any limit on the compensation of an audit committee member?

The Audit Committee Financial Expert - Defined

Are there any particular qualifications and disclosures required for any member of the audit committee?
When do the ACFE disclosure provisions become effective?
Who qualifies as an ACFE?
Does an issuer have an ACFE if, collectively, the members of the audit committee possess the attributes of an ACFE, even though no one member possesses all the attributes?
With respect to criterion (ii) for qualifying as an ACFE, must the person have actual experience applying generally accepted accounting principles?
With respect to criterion (iii) for qualifying as an ACFE, must the person have experience preparing or auditing financial statements?
With respect to criterion (iii) for qualifying as an ACFE, if the person's experience is with the preparation or auditing of financial statements, must the person have actually done the hands on work?
With respect to criterion (iii) for qualifying as an ACFE, must the person have actually had the requisite experience in the industry of the issuer?
With respect to criterion (iv) for qualifying as an ACFE, must the person have actual experience with internal controls and procedures for financial reporting?
How does a person obtain the necessary attributes to qualify as an ACFE?
In order to qualify as an ACFE, must the person have obtained the requisite experience with a companythat filed reports with the SEC?
Does educational training satisfy the "other relevant experience" test for qualifying as an ACFE?
Does service on another audit committee satisfy the "other relevant experience" criterion or otherwise qualify the person for ACFE status?
Does prior service as a public accountant, an auditor or a principal financial officer, controller or principal accounting officer justify the board in deeming the person to be an ACFE?
Under Section 11 of the Securities Act, the liability of an "expert" is governed by different standards than the liability of other persons who are exposed to suit where a materially false and misleading registration has become effective. Is an ACFE an "expert" for purposes of Section 11?
Does being an ACFE impose any additional duty, obligation or liability on that person as compared to other members of the audit committee or the board of directors?
Does the presence of an ACFE on the audit committee reduce the duties, obligations or liabilities of any other member of the audit committee or board of directors?

The Audit Committee Financial Expert - Disclosure

What are the options an issuer has with regard to disclosing whether a member of the audit committee is an ACFE?
If the board has determined that the audit committee includes an ACFE, what specific disclosure obligations does the issuer have?
What does it mean to be independent within the standards of Item 7(d)(3)(iv) of Schedule 14A?
If the issuer has determined that there is an ACFE on the audit committee, must it determine whether other members of the audit committee also qualify as ACFEs?
What are the issuer's disclosure obligations if the issuer does determine that there is more than one ACFE on the audit committee?
If the issuer has determined there is no ACFE on its audit committee, what specific disclosure obligations does the issuer have?
Is the issuer required to make ACFE-related disclosures in its proxy statement?
Is the issuer required to make ACFE-related disclosures in a registration statement?
Are there any other ACFE-based disclosure requirements?

The Fundamental Duties and Responsibilities of an Audit Committee

What are the principal duties of the audit committee?
Have the SROs defined the principal duties of the audit committee in more detail?
What specific duties has the NYSE specified for audit committees?
What specific duties has Nasdaq specified for audit committees?
Is the audit committee required to have a formal charter?
What do the SRO rules specify that an audit committee charter must contain?
What is the relationship between the audit committee and the issuer's public accounting firm?
What are the responsibilities of the audit committee with respect to the selection of the issuer's public accounting firm?
What are the responsibilities of the audit committee with respect to the receipt of information from the outside auditing firm for the issuer?
What are the responsibilities of the audit committee with regard to the receipt of any complaints or concerns about the issuer?
What are the responsibilities of the audit committee with regard to reports from legal counsel for the issuer?

Auditor Independence Requirements as they Relate to the Function of the Audit Committee

What is the basic concept of independence with reference to a public accounting firm?
How does a public accounting firm qualify as independent of the issuer?
What are "auditing services"?
What is an "audit report"?
What is the "audit and professional engagement period"?
What is the difference between audit and non-audit services rendered by a public accounting firm?
What is the significance of an issuer's public accounting firm rendering non-audit services to the issuer?
What is the significance of the public accounting firm having rendered non-audit services to the issuer when it thereafter becomes the firm’s independent accountant?
What non-audit services are grandfathered as exceptions to the prohibitions in Section 210.2-01(c)(4)?
Is it permissible for the accounting firm that provides audit services to an issuer to render any non-audit services?
Under what circumstances may these permissible non-audit services be provided by the issuer's auditing firm?
Are the pre-approval policies of the audit committee that pertain to the independence of the accountant required to be disclosed?
Are the pre-approval policies to be disclosed verbatim, or may they be summarized?
Is disclosure required of any of the services rendered by the accounting firm pursuant to a waiver of the pre-approval policies and procedures established by the audit committee?
Who controls the compensation of the public accounting firm for auditing the issuer?

Resources of the Audit Committee

What provisions are there in the law or regulations for engaging support for the work of audit committees?
How is the work of the audit committee funded, including the payment of outside advisors to the audit committee?

Communications between the Accounting Firm and the Audit Committee

Section 210.2-07(a) requires certain communications to the audit committee by the public accounting firm that performs the audit for the issuer, prior to the filing of the audit report with the SEC. Must these communications be in writing?
Section 210.2-07(a) requires that the public accounting firm communicate to the audit committee all critical accounting policies and practices to be used. What are "critical accounting policies"?
What is the public accounting firm to report to the audit committee regarding critical accounting policies?
Section 210.2-07(a) requires that the public accounting firm communicate to the audit committee all alternative treatments within generally accepted accounting principles for policies and practices related to material items that have been discussed with management of the issuer. What is the scope of the required communications?
How specific should the communications be regarding the alternative accounting treatments?
In addition to discussing the accounting treatment of specific transactions, should there be communications between the accounting firm and the audit committee regarding general accounting policies?
Section 210.2-07(a) requires that the public accounting firm communicate to the audit committee other material written communications between the public accounting firm and the management of the issuer. What communications are to be shared under this rule?
When are the communications required by Section 210.2-07(a) to occur?

Improper Influence on the Conduct of an Audit

What constitutes the improper influence on the conduct of an audit by an audit committee member?
Does this prohibition apply only when the director acts fraudulently?
What kind of audit committee member action in particular is prohibited by Rule 13b2-2?

Liability of Audit Committee Members

Does service on an audit committee expose members to any liability greater than that of other directors?
Is there a defense to control person liability?
Under what circumstances would an audit committee member sustain these defenses?

The Basic Nature of an Audit Committee and Related Disclosures

What is an audit committee?

Under the federal securities laws, an "audit committee" means "a committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer."

Source: Section 3(a)(58)(A) of the Securities Exchange Act, added by the Sarbanes-Oxley Act.

Is a public corporation required to have an audit committee?

Under the federal securities laws, a public corporation is not required to have an audit committee. However, in compliance with SEC rules, the SRO rules mandate that there be an audit committee for a company whose shares trade on that SRO.

Source: SEC Rule 10A-3; NYSE Section 303A.06; Nasdaq Rule 4350(d)(2)(A) and Interpretative Material IM-4350-4.

Under the federal securities laws, what body is treated as the "audit committee" if the issuer has not appointed specific members of the board of directors to be the audit committee?

If the issuer has not established a separate committee designated as an audit committee, the "audit committee" is the "entire board of directors of the issuer."

Source: Section 3(a)(58)(B) of the Securities Exchange Act, added by the Sarbanes-Oxley Act.

What person or body serves as the audit committee if an issuer does not have a board of directors?

Some entities, such as limited partnerships, do not have a board of directors, and they may not have a general partner that serves as an oversight entity. The SEC has determined that in those situations the issuer should look through each general partner of the successive limited partnerships until a corporate general partner or an individual general partner is reached. In the case of a corporate general partner, the issuer should look to that partner's audit committee or to its full board for fulfilling the role of the issuer's audit committee. In the case of an individual general partner, that individual serves as the audit committee.

Source: Securities Act Release 8183, Section II.F.4.

What disclosures must be made regarding an audit committee?

If the issuer’s securities are listed on a national securities exchange or the automated inter-dealer quotation system of Nasdaq and the issuer is filing a Form 10-K or filing a proxy statement or information statement with respect to the election of directors, and it is not relying on any exemption under Rule 10A-3(c)(4) through (c)(7) under the Exchange Act, the issuer must disclose whether it has a separately-designated standing audit committee established in accordance with S of the Exchange Act, or a committee performing similar functions. If it has such a committee, however it is designated, it must identify each committee member. If the entire board of directors is acting as the audit committee as specified in Section 3(a)(58)(B) of the Exchange Act, the issuer must so state.

If the issuer has an audit committee, the proxy statement for the annual meeting of stockholders for the election of directors must contain an audit committee report that states whether the audit committee has reviewed and discussed the audited financial statements with management; whether it has discussed certain specified matters with the independent auditors; whether it has received certain written disclosures from the independent accountants; and whether the audit committee has recommended to the full board of directors that the audited financial statements be included in the Form 10-K. This disclosure must be followed by the name of each member of the audit committee.

The proxy statement must disclose if the board of directors has adopted a written charter for the audit committee and, if so, include a copy as an appendix to the proxy statement unless that has been done within the past three fiscal year.

If the issuer’s securities are listed on an SRO, the issuer must disclose whether the members of the audit committee are independent within the meaning of the applicable SRO listing standards.

If the issuer’s securities are not listed, the issuer must disclose whether it has an audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act and, if so, whether its members are independent, using an approved definition of “independence” of a national securities exchange or national securities association

Other audit committee disclosure issues are discussed in response to the questions questions Who may be a member of the audit committee of a company whose shares are listed on an SRO? Are there any particular qualifications and disclosures required for any member of the audit committee?; Is there any limit on the number of audit committees on which one person may serve?; When do the ACFE disclosure provisions become effective?; Are the pre-approval policies of the audit committee that pertain to the independence of the accountant required to be disclosed?; Are the pre-approval policies to be disclosed verbatim, or may they be summarized?; and Is disclosure required of any of the services rendered by the accounting firm pursuant to a waiver of the pre-approval policies and procedures established by the audit committee? as well as under the general topic The Audit Committee Financial Expert – Disclosure.

Source: Items 7(b) and (d) of Schedule 14A; Regulation S-K, Items 401 and 306.

Are any certifications required with regard to the audit committee itself?

Yes. The chief executive officer of each NYSE-listed company must certify to the NYSE each year that he or she is not aware of any violation by the company of NYSE corporate governance listing standards, which include the standards regarding the composition of and charter for the audit committee. This certification must be included in the company’s annual report to shareholders; if there is no such report, then it must be included in the Form 10-K. In addition, the company’s chief executive officer must promptly notify the NYSE in writing after he or she becomes aware of any material non-compliance with the corporate governance standards.

A Nasdaq-listed company must certify that it has adopted a formal written audit committee charter and that the audit committee has reviewed and reassessed the adequacy of the charter on an annual basis. The company must also certify, presumably to Nasdaq, that it has and will continue to have an audit committee meeting the Nasdaq requirements. The company must notify Nasdaq after an executive officer becomes aware of any material noncompliance with the Nasdaq corporate governance rules.

Source: Nasdaq Rules 4350(d)(1), (2) and 4350(m); NYSE Section 303A.12(a) and Commentary thereto and Section 303A.12(b).

The Membership and Composition of an Audit Committee

What relationships can a member of the audit committee have with the issuer?

The SEC does not specify any standards for audit committee membership for a company whose shares are not listed on an SRO. (However, a non-listed issuer must specify whether its members meet the independence standards of an SRO. See What disclosures must be made regarding an audit committee?) Standards are specified where the company’s shares are listed on an SRO.

Who may be a member of the audit committee of a company whose shares are listed on an SRO?

The rules of the SEC specify that for a company whose securities are listed on an SRO, each member of the audit committee will have to be independent of the issuer. This means that the audit committee member may not (other than as a member of any committee of the board or as a member of the board of directors) accept any consulting, advisory, or other compensatory fee from the issuer, or otherwise be an “affiliated person” of the issuer or any subsidiary of the issuer.

The membership of the audit committee of a company listed on the NYSE or Nasdaq must meet the independence requirements of SEC Rule 10A-3, which requires that each member of the audit committee must be a director of the issuer and must be independent.

While Rule 10A-3 sets forth a test for independence that the rules of the NYSE and Nasdaq must meet, each of those SROs has adopted more stringent requirements for independence. The details of these important independence standards are beyond the scope of these FAQs. One exception is provided by Nasdaq, which permits membership of one person who is not independent under Nasdaq’s rules but who meets the criteria of independence in Section 10A(m)(3) of the Exchange Act and is not a current officer, employee or family member thereof (as defined in Nasdaq’s rules) “if the board, under exceptional and limited circumstances. determines that membership on the [audit] committee by the individual is required by the best interests of the company and its shareholders.” Any such member may not serve for more than two years and may not chair the committee. There must be proxy statement (or, if there is no proxy statement, Form 10-K) disclosure of this determination.

Source: Section 10A(m)(3)(A)-(B) of the Securities Exchange Act, added by the Sarbanes-Oxley Act.; SEC Rule 10A-3; NYSE Sections 303A.02 and .07; NASD Rules 4200(a)(15) and 4350(d)(2)(A)(i) and 4350(d)(2)(B)and Interpretative Material IM-4200 (regarding the meaning of “independent director”) and IM-4350-4.

Is there a required minimum number of members of an audit committee for an SRO-listed company?

Yes. An SRO-listed company audit committee must have at least three (3) members.

Source: NYSE Section 303A.07(a); Nasdaq Rule 4350(d)(2)(A).

Are members of the audit committee of an SRO-listed company required to have any special qualifications, in addition to being independent?

Yes. The NYSE specifies that “[e]ach member of the audit committee must be financially literate, as such qualification is interpreted by the company’s board in its business judgment, or must become financially literate within a reasonable period of time after his or her appointment to the audit committee.” Further, “at least one member of the audit committee must have accounting or related financial management expertise, as the company’s board interprets such qualification in its business judgment.” A board may presume that a person who qualifies as an “audit committee financial expert” (see The Audit Committee Financial Expert - Defined) has such expertise.

Nasdaq specifies that each audit committee member must “be able to read and understand fundamental financial statements, including a company’s balance sheet, income statement, and cash flow statement.” At least one audit committee member must have“past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior official with financial oversight responsibilities.” A director who qualifies as an audit committee financial expert (see The Audit Committee Financial Expert - Defined) is presumes to meet these criteria.

Source: Commentary to NYSE Section 303A.07(a); Nasdaq Rule 4350(d)(2)(A)(i) and Interpretative Material IM-4350-4.

Is there any limit on the number of audit committees on which one person may serve?

The SEC does not impose any limit on the number of audit committees on which one person may serve. The NYSE rules provide, however, that in addition to considering the time commitments and other demands of audit committee service before a person accepts audit committee service, “if an audit committee member simultaneously serves on the audit committees of more than three public companies, and the listed company does not limit the number of audit committees on which an audit committee member serve . . . the board must determine that such simultaneous service would not impair the ability of such member to effectively serve on the listed company’s audit committee” and disclose that determination in the company’s proxy statement or, if there is no proxy statement, in the Form 10-K.

Source: Commentary to NYSE Section 303A.07(a).

Is there any limit on the compensation of an audit committee member?

None of the SEC rules impose any limit on the compensation that a corporation may pay a board member, including a member of the audit committee, for board or committee service. The added responsibilities imposed on audit committee members by the new rules may justify increased compensation in the exercise of the business judgment of the board of directors, recognizing at the same time additional responsibilities imposed on all board members by the Sarbanes-Oxley Act and the new rules there under.

The Audit Committee Financial Expert - Defined

Are there any particular qualifications and disclosures required for any member of the audit committee?

No specific qualifications are required for members of an audit committee other than the special qualification for audit committee members of issuers listed for trading on an SRO. However, an issuer must disclose whether the board of directors has determined that at least one member of the audit committee is an audit committee financial expert ("ACFE"). The SROs do not require that an audit committee include an ACFE.

In addition, Nasdaq recommends that an issuer disclose in its proxy statement (or if there is no proxy statement, then in the Form 10-K) if any director is deemed independent but is not covered by the safe harbor that deems a person not a control person that is provided in SEC Rule 10A-3(e)(ii).

Source: Regulation S-K, Item 401(h)(1) as implemented by Item 10 of Form 10-K. A similar rule applies to small business issuers. Regulation S-B, Item 401(e) and Item 10 of Form 10-KSB. The remaining references in this section of this article will be to the ACFE provisions for issuers that are not small business issuers. Commentary to NYSE Section 303A.07(a). The Nasdaq suggestion referred to appears in Interpretative Material IM-4350(d).

When do the ACFE disclosure provisions become effective?

For issuers that report on Form 10-K, the disclosure requirements are effective for annual reports for fiscal years ending on or after July 15, 2003. For small business issuers, required compliance begins with the annual report for fiscal years ending on or after December 15, 2003.

Who qualifies as an ACFE?

An ACFE is a person who has all of the following attributes:

an understanding of generally accepted accounting principles and financial statements;
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 that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant'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.

Note that an ACFE must possess all of these attributes. The focus is on someone with a thorough understanding of the audit committee's oversight role, expertise in accounting matters and an understanding of financial statements, as well as the ability to determine whether the issuer's financial statements are complete and accurate.

Source: Regulation S-K Item 401(h)(2); Securities Act Release 8177, Section II.A.1.

Does an issuer have an ACFE if, collectively, the members of the audit committee possess the attributes of an ACFE, even though no one member possesses all the attributes?

No. The ACFE designation applies on an individual-by-individual basis. Collective expertise of an audit committee as a whole is not sufficient.

Source: Securities Act Release 8177, Section II.A.4.d.

With respect to criterion (ii) for qualifying as an ACFE, must the person have actual experience applying generally accepted accounting principles?

Actual experience applying generally accepted accounting principles is not a requisite for qualifying as an ACFE. The ability to assess the application of generally accepted accounting principles is necessary and sufficient. Requiring actual experience may dilute the pool of potential qualifiers as ACFEs.

Source: Securities Act Release 8177, Section II.A.4.d.

With respect to criterion (iii) for qualifying as an ACFE, must the person have experience preparing or auditing financial statements?

It is not necessary to possess experience in actually preparing or auditing financial statements. Because the purpose of the qualifications is to assure that the ACFE has actual experience working with financial statements, it is sufficient if the person has experience analyzing or evaluating financial statements, even if the person has never prepared or audited a financial statement. Thus, a person who has been actively engaged in investment banking, venture capital, or financial analysis could qualify as an ACFE.

Source: Securities Act Release 8177, Section II.A.4.d.

With respect to criterion (iii) for qualifying as an ACFE, if the person's experience is with the preparation or auditing of financial statements, must the person have actually done the hands-on work?

No. This criterion can be satisfied either by direct work or by functioning in a supervisory capacity with respect to others who prepared or audited financial statements. This requires, however, active supervision, and not merely having been a supervisor in a traditional hierarchical reporting relationship. For example, serving as a principal executive officer may entail supervision of those who prepare financial statements, but that would not necessarily qualify as active supervision that would provide the necessary experience to qualify as an ACFE.

Source: Securities Act Release 8177, Section II.A.4.d.

Again with respect to criterion (iii) for qualifying as an ACFE, must the person have actually had the requisite experience in the industry of the issuer?

Actual experience with financial statements in the issuer's industry is not required in order to be an ACFE for that issuer.

Source: Securities Act Release 8177, Section II.A.d.4.

With respect to criterion (iv) for qualifying as an ACFE, must the person have actual experience with internal controls and procedures for financial reporting?

Actual experience with internal controls and procedures for financial reporting is not required in order to qualify as an ACFE, so long as the person has an understanding of these matters. An ACFE must understand why controls and procedures exist, how they were developed and how they operate.

Source: Securities Act Release 8177, Section II.A.4.d.

How does a person obtain the necessary attributes to qualify as an ACFE?

A person may acquire such attributes through:

Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions;
experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions;
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.

These four alternatives are the only acceptable means for acquiring the necessary attributes.

Source: Regulation S-K, Item 401(h)(3).

In order to qualify as an ACFE, must the person have obtained the requisite experience with a company that filed reports with the SEC?

No. The requisite experience may have been obtained with a private company or a public company, as well as in a governmental or self-regulatory context.

Source: Securities Act Release 8177, Section II.A.4.d.

Does educational training satisfy the "other relevant experience" test for qualifying as an ACFE?

Education or training alone does not satisfy the "other relevant experience" test.

Source: Securities Act Release 8177, Section II.A.4.d.

Does service on another audit committee satisfy the "other relevant experience" criterion or otherwise qualify the person for ACFE status?

Service on another audit committee does not necessarily meet any of the criteria for qualifying as an ACFE. The board must make an independent determination whether the person satisfies one of the specific criteria for acquiring the attributes of an ACFE.

Source: Securities Act Release 8177, Section II.A.4.d.

Does prior service as a public accountant, an auditor or a principal financial officer, controller, or principal accounting officer justify the board in deeming the person to be an ACFE?

No specific prior experience automatically qualifies one as an ACFE. The board of directors must make an independent evaluation of the person's actual prior experience to determine if the person qualifies as an ACFE.

Source: Securities Act Release 8177, Section II.A.4.d.

Under Section 11 of the Securities Act, the liability of an "expert" is governed by different standards than the liability of other persons who are exposed to suit where a materially false and misleading registration has become effective. Is an ACFE an "expert" for purposes of Section 11?

No. An ACFE is not an "expert" for any purpose, including Section 11. This is established by a safe harbor provided by the SEC. Of course, if the person otherwise qualifies as an expert with respect to some portion of the registration statement within the terms of Section 11, the "expert" provisions of Section 11 would apply to the audit committee member to that extent.

Source: Regulation S-K, Item 401(h)(4)(i); Securities Act Release 8177, Section II.A.5

Does being an ACFE impose any additional duty, obligation or liability on that person as compared to other members of the audit committee or the board of directors?

No, being an ACFE does not increase that person's duties, obligations or liabilities.

Source: Regulation S-K, Item 401(h)(4)(ii).

Does the presence of an ACFE on the audit committee reduce the duties, obligations or liabilities of any other member of the audit committee or board of directors?

No. The presence of an ACFE has no effect on the duties, obligations or liabilities of other directors.

Source: Regulation S-K, Item 401(h)(4)(iii).

The Audit Committee Financial Expert - Disclosure

What are the options an issuer has with regard to disclosing whether a member of the audit committee is an ACFE?

The issuer must disclose in its Form 10-K either that the board has determined that at least one member of the audit committee is an ACFE, or that it does not have an ACFE on the audit committee. The board of directors does not have the option not to make a determination of whether any member of the audit committee qualifies as an ACFE, nor may it disclose that there is no ACFE if in fact the board has determined that that there is an ACFE on the audit committee.

Source: Regulation S-K, Item 401(h)(1)(i), as implemented by Item 10 of Form 10-K; Securities Act Release 8177, Section II.A.2.

If the board has determined that the audit committee includes an ACFE, what specific disclosure obligations does the issuer have?

If the issuer has determined that there is an ACFE on its audit committee, the issuer's Form 10-K must disclose the name of that person and whether that person is independent within the standards of Item 7(d)(3)(iv) of Schedule 14A.

Source: Regulation S-K, Item 401(h)(1)(ii).

What does it mean to be independent within the standards of Item 7(d)(3)(iv) of Schedule 14A?

Item 7(d)(3)(iv) applies the listing standards of the market where the issuer's stock is traded. Thus, in the case of the New York Stock Exchange, this is current Section 303.01(B)(2)(a) and (3).

Under these provisions, a director who is an employee (including a non-employee executive officer) of the company or any of its affiliates may not serve on the audit committee until three years following the termination of his or her employment. A director who (i) is a partner, controlling shareholder, or executive officer of an organization that has a business relationship with the company, or (ii) has a direct business relationship with the company (e.g., a consultant), may serve on the audit committee only if the company's board of directors determines in its business judgment that the relationship does not interfere with the director's exercise of independent judgment.

In making the determination regarding the independence of a director in this circumstance, the board of directors should consider, among other things, the materiality of the relationship to the company, to the director, and, if applicable, to the organization with which the director is affiliated. "Business relationships" can include commercial, industrial, banking, consulting, legal, accounting, and other relationships. A director can have a "business relationship" directly with the company, or the director can be a partner, officer, or employee of an organization that has such a relationship.

A director may serve on the audit committee without the board of directors' determination after three years following the termination of, as applicable, either (1) the relationship between the organization with which the director is affiliated and the company; (2) the relationship between the director and his or her partnership status, shareholder interest, or executive officer position; or (3) the direct business relationship between the director and the company.

A director who is employed as an executive of another corporation where any of the company's executives serves on that corporation's compensation committee may not serve on the audit committee. Finally, a director who is an immediate family member of an individual who is an executive officer of the company or any of its affiliates cannot serve on the audit committee until three years following the termination of such employment relationship.

The NYSE and Nasdaq have adopted independence standards that apply to all members of the audit committee. These comply with SEC Rule 10A-3(b)(1)(ii). This rule mandates that self-regulatory organizations impose an independence standard to ensure, at a minimum, that no member of the audit committee may accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the issuer or any subsidiary thereof, nor may an audit committee member be an affiliated person of the issuer or any subsidiary thereof. With respect to prohibited compensatory fees, unless the rules of the applicable SRO provide otherwise, compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the listed issuer so long as such compensation is not contingent in any way on continued service.

Source: Item 7(d)(3)(iv) of Schedule 14A; Rule 10A-3(b)(1)(ii); NYSE Sections 303A.02 and .07(b); Nasdaq Rules 4200(a)(15) and 4350(d)(2); Exchange Act Release 48745, text at note 379.

If the issuer has determined that there is an ACFE on the audit committee, must it determine whether other members of the audit committee also qualify as ACFEs?

No. There is no obligation to evaluate the status of every member of the audit committee once it has been determined that there is an ACFE member.

Source: Securities Act Release 8177, Section II.A.2.

What are the issuer's disclosure obligations if the issuer does determine that there is more than one ACFE on the audit committee?

If there is more than one ACFE on the audit committee, the issuer may-but need not-disclose the names of the additional persons who qualify as ACFEs. The issuer must still disclose the name of at least one of the ACFEs. If the issuer chooses to identify more than one ACFE by name, it must then disclose whether the additional ACFEs are independent.

Source: Regulation S-K, Instruction to paragraph (h)(1) of Item 401.

If the issuer has determined there is no ACFE on its audit committee, what specific disclosure obligations does the issuer have?

If the issuer has determined that it does not have an ACFE on its audit committee, its Form 10-K must explain why it does not have an ACFE. The issuer may also disclose the attributes that the various members of the audit committee have, even though collective possession of all the attributes by the members as a group does not satisfy the criteria for having an ACFE.

Source: Regulation S-K, Item 401(h)(1)(iii) as implemented by Item 10 of Form 10-K; Securities Act Release 8177, Section II.A.4.d.

Is the issuer required to make ACFE-related disclosures in its proxy statement?

Disclosure regarding ACFEs is not required in a proxy statement as a general matter. However, if the issuer elects to include the information in its proxy statement, it may incorporate the disclosure by reference in the Form 10-K.

Source: Regulation S-K, Instruction No. 1 to Item 401(h); Securities Act Release 8177, Section II.A.7.

Is the issuer required to make ACFE-related disclosures in a registration statement?

No ACFE-related disclosure is required in a registration statement. The only required disclosure is in the issuer's annual report. An issuer may, of course, make disclosure in any other document and, as noted, may make the disclosure in its proxy statement and incorporate that information in its annual report in accordance with the standard incorporation by reference criteria.

Source: Securities Act Release 8177A, Section I.

Are there any other ACFE-based disclosure requirements?

Yes. If the identified ACFE qualifies as such by reason of "other relevant experience," that experience must be disclosed. The appropriate disclosure is made in Form 10-K in response to Item 401(e) of Regulation S-K, which calls for a description of the business experience of a director.

Source: Regulation S-K, Instruction No. 2 to Item 401(h).

The Fundamental Duties and Responsibilities of an Audit Committee

What are the principal duties of the audit committee?

The audit committee is charged by the Exchange Act and SEC rules with a number of responsibilities in the oversight of the outside auditing firm for the issuer and of the audit itself, certain aspects of the issuer's disclosure, the receipt of complaints about the issuer's financial disclosures, and other matters.

Have the SROs defined the principal duties of the audit committee in more detail?

Yes. The NYSE and Nasdaq rules contain a number of specific responsibilities of the audit committee, in addition to those prescribed by SEC Rule 10A-3(b) regarding the oversight of the issuer’s public accounting firm (see What is the relationship between the audit committee and the issuer’s public accounting firm? and subsequent FAQs ) and receipt of complaints (see What are the responsibilities of the audit committee with regard to the receipt of any complaints or concerns about the issuer?).

What specific duties has the NYSE specified for audit committees?

The NYSE specifies that the purposes of the audit committee include assisting the board 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 and the performance of the company’s internal audit function and independent auditors.

The audit committee is to perform an annual self-evaluation.

In addition, the audit committee must at least annually review a report by the independent auditor describing: the auditing firm’s internal quality-control procedures; any material issues raised by the most recent internal quality-control or peer review report or raised by any inquiry or investigation by governmental or professional authorities within the preceding five years respecting any independent audit carried out by the firm, and any steps taken to deal with such issues; and to assess the auditor’s independence. This evaluation should include a review and evaluation of the lead partner on the audit engagement. In this connection the audit committee should consider whether to rotate the audit firm in addition to the mandated rotation of the lead partner. The conclusion of this analysis should be presented to the full board.

The audit committee must also discuss the company’s quarterly financial statements and annual audited financial statements with management and the independent auditor, including the company’s MD&A disclosures; and discuss the company’s earnings press releases, including any earnings guidance provided to analysts. The discussion of press releases, however, need not precede the issuance of the release.

The audit committee must discuss policies regarding risk assessment and risk management, focusing on the major financial risk exposures and the steps management has taken to monitor and control those exposures. While other functions within the company may be principally responsible for risk management, the audit committee should review these processes.

The audit committee should meet separately, periodically, with management, with the personnel responsible for the internal audit function, and with independent auditors. (All NYSE-listed companies must have an internal audit function, although it may be outsourced to a firm other than the company’s independent auditor.)

The audit committee must review with the independent auditor any audit problems or difficulties and management’s responses, including any restriction on the scope of audit work or access to requested information.

The audit committee must set clear hiring policies for employees or former employees of the independent auditor.

The audit committee must report regularly to the board of directors, including a review of any issues that arise with respect to the quality and integrity of the financial statements, the compliance with legal and regulatory requirements, the performance of the independent auditors and the performance of the internal audit function.

Source: NYSE Section 303A.07(c), (d) and Commentary thereto.

What specific duties has Nasdaq specified for audit committees?

Nasdaq has not enumerated the duties of the audit committee with the detail that the NYSE did. For the most part the Nasdaq prescribes the duties mandated by SEC Rule 10A-3(b). Nasdaq does require, however, that the audit committee approve any “related party transactions” as that phrase as defined in Item 404 of Regulation S-K. A related party transaction is proposed transaction, or series of similar transactions, to which the issuer or one of its subsidiaries was or is to be a party and in which any director or executive officer of the issuer; or any nominee for election as a director; or any security holder who is known to the issuer to own of record or beneficially more than five percent of any class of its voting securities; or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, in which the amount involved exceeds $60,000.

Source: Nasdaq Rule 4350(d)(3) and Interpretative Material IM-4350-4, and Rule 4350(h); Regulation S-K, Item 404

Is the audit committee required to have a formal charter?

The SEC rules do not require that each audit committee have a formal charter. However, the SRO rules do contain that requirement.

What do the SRO rules specify that an audit committee charter must contain?

An NYSE-listed company must have an audit committee charter that specifies the audit committee’s purpose, an annual performance evaluation of the audit committee, and the duties and responsibilities of the audit committee. See What specific duties has the NYSE specified for audit committees?

The Nasdaq rules require a charter, which must be reassessed annually for its adequacy, that must specify:

the scope of the audit committee’s responsibilities and how it carries out those responsibilities (including structure, processes, and membership requirements);
the audit committee’s responsibilities for ensuring receipt from the outside auditors of a formal written statement delineating all relationships between the auditor and the company and the audit committee’s responsibility for actively engaging in a dialogue with the auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the auditor and for taking, or recommending that the full board take, appropriate action to oversee the independence of the outside auditor;
the committee’s purpose of overseeing the accounting and financial reporting processes of the issuer and the audits of its financial statements; and
the specific audit committee responsibilities imposed by Nasdaq Rule 4350(d)(3).

The charter of an Nasdaq-listed company also must provide for the exercise of the responsibilities prescribed in SEC Rule 10A-3(b)(2), (3), (4) and (5) and specifically provide for the procedures for submission of concerns by employees as required by SEC Rule 10A-3(b)(3)(ii).

Source: NYSE Section 303A.07(c); Nasdaq Rule 4350(d)(1) and Interpretative Material IM-4350-4.

What is the relationship between the audit committee and the issuer's public accounting firm?

The audit committee is directly responsible for the appointment, compensation, and oversight of the work of any public accounting firm employed by the issuer for the purpose of preparing or issuing an audit report or related work. The public accounting firm must report directly to the audit committee. This relationship includes the resolution of disagreements between management of the issuer and the auditor regarding financial reporting.

Source: Section 10A(m)(2) of the Securities Exchange Act, added by the Sarbanes-Oxley Act.

What are the responsibilities of the audit committee with respect to the selection of the issuer's public accounting firm?

The issuer's public accounting firm must be "independent" of the issuer in order for the accountant's report on the issuer's financial statements to be accepted for various purposes under the federal securities laws, such as inclusion in the issuer's Form 10-K. A public accounting firm is not independent unless one of several criteria is satisfied in its engagement. The audit committee plays a role with respect to each of those criteria.

What are the responsibilities of the audit committee with respect to the receipt of information from the outside auditing firm for the issuer?

The public accounting firm that performs the audit for the issuer shall report to the audit committee, before its audited report is filed with the SEC, all critical accounting policies and practices to be used; all alternative treatments within generally accepted accounting principles for policies and practices related to material items that have been discussed with management of the issuer, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the public accounting firm; and other material written communications between the public accounting firm and the management of the issuer, such as any management letter or schedule of unadjusted differences. These required communications are in addition to reporting requirements embodied in generally accepted auditing standards.

Source: Regulation S-X, Section 210.2-07(a); Securities Act Release 8183, Section II.G.

What are the responsibilities of the audit committee with regard to the receipt of any complaints or concerns about the issuer?

Each audit committee of an issuer that is listed on an SRO will be required to establish procedures for the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters, and procedures for the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.

In this connection, it should be noted that the rules of the SEC implementing Section 406(a) of the Sarbanes-Oxley Act, which requires disclosure of whether or not an issuer has a code of ethics for senior financial officers, define a code of ethics as written standards including standards "reasonably designed . . . to promote . . . [t]he prompt internal reporting of violations of the code to an appropriate person or persons identified in the code . . . ." Some issuers may chose to have these reports go to the audit committee, or to have all aspects of compliance with a code of ethics be the responsibility of the audit committee.

Source: Section 10A(m)(4) of the Securities Exchange Act, added by the Sarbanes-Oxley Act; Regulation S-K, Item 406 (regarding the code of ethics for the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions), as implemented by Item 10 of Form 10-K.

What are the responsibilities of the audit committee with regard to reports from legal counsel for the issuer?

Implementation of the SEC’s new attorney conduct rules may involve audit committees in certain circumstances. New Part 205 of Title 17 of the Code of Federal Regulations sets forth minimum standards of conduct for an attorney who appears and practices before the SEC and imposes an obligation on such an attorney who becomes aware of evidence of a material violation by the issuer or by any officer, director, employee or agent of the issuer to report such evidence to the issuer internally as prescribed by Part 205.

Unless the attorney making the report reasonably believes that he has been provided with an appropriate response within a reasonable time, the attorney “shall report the evidence of a material violation” to the audit committee if there is one or, if there is no audit committee, then to another committee of the board consisting solely of non-employee directors, or if there is no such committee then to the full board of directors. Thus, when the issuer has an audit committee, the attorney should report his dissatisfaction with the response to that committee. If the attorney reasonably believes that it would be futile in the first instance to report the evidence to the chief legal officer or chief executive officer, he may report directly to the audit committee when there is one, or in the absence of an audit committee then to a committee of non-employee directors or, if there is no such committee, to the full board. The audit committee may be bypassed in these regards if the issuer has established a qualified legal compliance committee, at least one of whose members must be a member of the audit committee. If the qualified legal compliance committee determines that the evidence reported to it merits an investigation, it must, however, notify the audit committee or the full board of directors. Many of the terms in this paragraph are defined in Part 205.

The new attorney conduct rule does not specify what actions the audit committee is to take should it receive a report from counsel. The audit committee should proceed as in any case when it receives material information regarding the issuer that merits further action in the best interest of the issuer and in compliance with the law.

Source: Section 307 of the Sarbanes-Oxley Act, 15 U.S.C. § 7245; Securities Act Release 8185; 17 CFR Part 205

Auditor Independence Requirements as they Relate to the Function of the Audit Committee

What is the basic concept of independence with reference to a public accounting firm?

To be independent with respect to an audit client, an accountant must be capable of exercising objective and impartial judgment on all issues encompassed within the accountant's engagement.

Source: Regulation S-X, Section 210.2-01(b). As a result of the requirements of the Sarbanes-Oxley Act, the SEC has promulgated a number of rules that pertain to accountant independence. These rules, which supplement the rules on that subject that were promulgated by the SEC in Securities Act Release 7919 (Nov. 21, 2000), appear principally in Section 210.2-01 of Regulation S-X. Among other things, an accountant is not independent of an audit client if, at any point during the audit and professional engagement period, any audit partner earns or receives compensation based on the audit partner procuring engagements with that audit client to provide products or services other than audit, review, or attest services. Section 210.2-01(c)(8).

How does a public accounting firm qualify as independent of the issuer?

One way to satisfy the independence test is that the engagement of the accounting firm is approved in advance by the audit committee, whether the services are audit services or non-audit services.

The second way to satisfy the independence test is that the engagement of the accounting firm is entered into pursuant to pre-approval policies and procedures that were established by the audit committee, provided that the policies and procedures are detailed as to the particular service, the audit committee is informed of each service and there is no delegation of audit committee responsibilities under the Securities Exchange Act to management of the issuer. This last criterion is best implemented by having policies that are sufficiently detailed so that there is no exercise of discretion by management in applying the policies, i.e., there is no occasion for management to exercise a judgment as to whether a service is within the policy. A monetary limit cannot be substituted for this pre-approval process, nor can it encompass broad categories, because the pre-approval process must address the “particular” service. This pre-approval process encompasses auditors for a foreign subsidiary of the issuer where those auditors are not part of the independent accounting firm’s worldwide network.

The third way to satisfy the independence test applies only to services other than audit, review, or attest services. The pre-approval requirement for independence is waived for these other services if three conditions are satisfied:

the aggregate amount of services provided by the public accounting firm is no more than 5% of the total amount of revenues paid by the audit client to the accounting firm during the fiscal year in which the services are provided;
the services were not recognized at the time of the engagement to be non-audit services, and
the services are both promptly brought to the attention of the audit committee and are either approved by the audit committee prior to completion of the audit or are approved by one or more members of the audit committee to whom authority to grant such approvals has been delegated by the audit committee.

Source: Regulation S-X, Section 210.2-01(c)(7)(i); SEC FAQ Aug. 2003, Questions 21-24. . These principles for establishing independence were issued to implement Section 10A(i) of the Securities Exchange Act, added by the Sarbanes-Oxley Act.

What are "auditing services"?

This concept is not expressly defined by statute or rule. It is clear, however, that auditing services extend beyond doing the work necessary to render an audit report. For example, audit services include providing comfort letters in connection with securities underwritings and statutory audits required for insurance companies by state law. They also include services performed to fulfill responsibilities under generally accepted auditing standards and conferring with the accounting firm's national office on complex issues. In short, an "auditing service" is anything that is a necessary procedure used by the accountant in reaching an opinion on a financial statement.

Source: Section 10A(i)(1)(A) of the Securities Exchange Act, added by the Sarbanes-Oxley Act; Securities Act Release 8183, Section II.D.

What is an "audit report"?

An audit report is the accounting firm's report on an audit that is required to be filed with the SEC under the securities laws.

Source: This term is not expressly defined in the statute or rules. The concept is described in Regulation S-X, Section 210.2-07(a).

What is the "audit and professional engagement period"?

The audit period is the period covered by any financial statements being audited or reviewed. The professional engagement period begins at the earlier of the signing of the engagement letter by the accountant or the commencement of actual work, and ends when the issuer or the accountant notifies the SEC that the issuer is no longer that accountant's client.

Source: Regulation S-X, Section 210.2-01(f)(5).

What is the difference between audit and non-audit services rendered by a public accounting firm?

Non-audit services include bookkeeping or other services related to the accounting records or financial statements of the audit client; financial information systems design and implementation; appraisal or valuation services, fairness opinions, or contribution-in-kind reports; actuarial services; internal audit outsourcing services; management functions; human resources; broker-dealer, investment adviser or investment banking services; legal services; and expert services unrelated to the audit.

Source: Regulation S-X, Section 210.2-01(c)(4). Many of these types of services are described in more detail in the cited regulation.

What is the significance of an issuer's public accounting firm rendering non-audit services to the issuer?

An accounting firm is not independent if, at any point during the audit, the accountant provides the issuer with non-audit services of any of the types just described.

Source: Regulation S-X, Section 210.2-01(c)(4), implementing Section 10A(g) of the Securities Exchange Act, added by the Sarbanes-Oxley Act. There is an exception for certain grandfathered non-audit services as provided in Section 210.2-01(e)(1). Some of the specific types of prohibited non-audit services also have carve-outs. For example, performance of bookkeeping services, the design of financial information services, appraisal and evaluation services, actuarial services and internal audit services do not render the accountant non-independent if "it is reasonable to conclude that the results of these services will not be subject to audit procedures during an audit of the audit client's financial statements." Section 210.2-01(c)(4)(i) - (v). It is presumed that these services will be subject to audit procedures. Because the determination of whether audit procedures will be required involves a judgment of materiality, the presumption that the non-audit services will be subject to audit cannot be rebutted by determining that the services were immaterial.

Source: Release 8183, Section II.B & n.52; SEC FAQ Aug. 2003, Question 17.

What is the significance of the public accounting firm having rendered non-audit services to the issuer when it thereafter becomes the firm’s independent accountant?

If a firm that had not been independent in a prior year because the firm performed prohibited non-audit services and thereafter became independent and was engaged to perform the issuer’s audit, there is at least one potential problem. If in the course of conducting the audit the accounting firm became aware that restatements of the prior year’s financial statements were required, the newly engaged accounting firm could not reaudit the financial statements for the period when it was not independent by reason of having rendered non-audit services.

Source: SEC FAQ Aug. 2003, Question 16.

What non-audit services are grandfathered as exceptions to the prohibitions in Section 210.2-01(c)(4)?

Any service described in Section 210.2-01(c)(4) can be rendered until May 6, 2004, if it is pursuant to a contract in existence on May 6, 2003.

Source: Regulation S-X, Section 210.2-01(e)(1)(iii).

Is it permissible for the accounting firm that provides audit services to an issuer to render any non-audit services?

Yes. The categories of non-audit services enumerated in Section 210.2-01(c)(4) are strictly prohibited (subject to the grandfather provision in Section 210.2-01(e)(1)), but other non-audit services, including tax services, may be rendered. Nevertheless, there must be an assessment on a case-by-case basis whether the non-audit services would render the accounting firm non-independent. For example, accountants would impair their independence by representing an audit client before the tax court. However, purchasing or licensing income tax preparation software from the firm’s auditor is a permissible tax service, so long as the software does not perform additional functions. If the software does perform additional functions, each such function should be evaluated for its potential effect on the auditor’s independence. For example, the function of generating the tax accruals and disclosures relating to income taxes that will appear on the issuer’s financial statements is a prohibited non-audit function.

Source: Section 10A(h) of the Securities Exchange Act, added by the Sarbanes-Oxley Act; Securities Act Release 8183, Section II.B. 11; SEC FAQ Aug. 2003, Questions 18-19.

Under what circumstances may these permissible non-audit services be provided by the issuer's auditing firm?

Permissible non-audit services performed by the issuer's public accounting auditing firm must be pre-approved by the audit committee. The sole exception are certain so-called de minimus services, for which pre-approval is waived. These are services where the aggregate amount of services provided by the public accounting firm is no more than 5% of the total amount of revenues paid by the audit client to the accounting firm during the fiscal year in which the services are provided, the services were not recognized at the time of the engagement to be non-audit services, and the services are both promptly brought to the attention of the audit committee and are either approved by the audit committee prior to completion of the audit or are approved by one or more members of the audit committee to whom authority to grant such approvals has been delegated by the audit committee. Decisions made by these delegates must be reported to the full audit committee at the next scheduled meeting.

The audit committee may also grant pre-approval for permissible non-audit services for a wholly-owned subsidiary of the issuer which does not have its own audit committee.

Source: Sections 10A(h)-(i) of the Securities Exchange Act, added by the Sarbanes-Oxley Act; Regulation S-X, Section 210.2-01(c)(7)(i)(C); SEC FAQ Aug. 2003, Question 20. . The delegation of authority to one or more members of the audit committee for this limited purpose is provided for by Section 10A(i)(3) of the Securities Exchange Act, added by the Sarbanes-Oxley Act. The requirement to report to the full committee is expressed at Securities Act Release 8183, Section II.D (text at note 159).

Are the pre-approval policies of the audit committee that pertain to the independence of the accountant required to be disclosed?

Yes. The pre-approval policies must be disclosed in the issuer's proxy statement. The information must also be disclosed in the issuer's Form 10-K or 10-KSB. This can be accomplished through incorporation by reference from the proxy statement in appropriate circumstances.

Source: Item 9(e)(5)(i) of Schedule 14A requires disclosure of the audit committee's pre-approval policies and procedures for the engagement of the accounting firm. For the Form 10-K and 10-KSB requirements, see Item 16, implementing Section 10A(i)(2) of the Securities Exchange Act, added by the Sarbanes-Oxley Act.

Are the pre-approval policies to be disclosed verbatim, or may they be summarized?

It is permissible to summarize the policies, so long as it is done in a clear, concise, and understandable manner. The issuer may also make verbatim disclosure.

Source: Securities Act Release 8183, Section II.H.

Is disclosure required of any of the services rendered by the accounting firm pursuant to a waiver of the pre-approval policies and procedures established by the audit committee?

Yes. The proxy statement of the issuer must disclose the percentage of services performed by the accounting firm that are disclosed in the proxy statement that were approved by the audit committee pursuant to a waiver of the pre-approval policies and procedures. The categories of products and services for which these percentages must be disclosed are the following for the principal accounting firm for each of the two previous fiscal years: (1) audit services; (2) assurance and related services that are reasonably related to the audit or review of financial statements; (3) tax compliance, advice and planning services; and (4) all other products and services. The information must be disclosed in the issuer's Form 10-K or 10-KSB but it can be incorporated by reference from the proxy statement in appropriate circumstances.

Source: Item 9(e)(5)(ii), referring to Item 9(e)(1)-(4), of Schedule 14A. For the Form 10-K and 10-KSB requirements, see Item 16, implementing Section 10A(i)(2) of the Securities Exchange Act, added by the Sarbanes-Oxley Act.

Who controls the compensation of the public accounting firm for auditing the issuer?

For a company whose securities are listed on an SRO, the audit committee will control the compensation of the public accounting firm. Such an issuer will be required to provide for appropriate funding, as determined by the audit committee, for payment of compensation to the public accounting firm employed by the issuer for the purpose of rendering or issuing an audit report.

Source: Section 10A(m)(6)(A) of the Securities Exchange Act, added by the Sarbanes-Oxley Act.

Resources of the Audit Committee

What provisions are there in the law or regulations for engaging support for the work of audit committees?

For a company whose securities are listed on an SRO, the audit committee must be given the authority to engage independent counsel and other advisors, as it determines necessary.

Source: Section 10A(m)(5) of the Securities Exchange Act, added by the Sarbanes-Oxley Act.

How is the work of the audit committee funded, including the payment of outside advisors to the audit committee?

For a company whose securities are listed on an SRO, the audit committee must be provided appropriate funding, as determined by the audit committee itself, for payment of compensation to any advisors employed by the audit committee.

Source: Section 10A(m)(6)(B) of the Securities Exchange Act, added by the Sarbanes-Oxley Act.