SEC Adopts New Audit Committee Disclosure Rules


The Securities and Exchange Commission ("SEC") recently adopted new rules and amendments to its current rules governing audit committee disclosure. Specifically, the new rules and amendments require companies' independent auditors to review the companies' financial information prior to the company filing its quarterly reports, and require companies to include in their proxy statements certain disclosures about their audit committees. According to the SEC, the rules are designed to improve disclosure related to the functioning of corporate audit committees and to enhance the reliability and credibility of financial statements from public companies. The rules became effective January 31, 2000, with mandatory compliance phased in beginning with quarterly financial reports for periods ending on or after March 15, 2000 (and as further detailed in the box below), or earlier at the option of a company.

Pre-Filing Review of Quarterly Financial Statements

The new rules require public companies to have their interim financial statements (i.e., Forms 10-Q or l0-QSB) reviewed by an independent public accountant prior to filing them with the SEC. In conducting its review, the independent auditors must follow "professional standards and procedures for conducting such reviews, as established by generally accepted auditing standards." The SEC believes that this requirement will "facilitate early identification and resolution of material accounting and reporting issues" by involving auditors in the process earlier in the year, and consequently reduce the likelihood of restatements or other year-end adjustments.

Audit Committee Report

Under the new rules, audit committees are required to provide a report in the company's proxy or information statement that relate to shareholders votes for the election of directors. In the report, the audit committee must state whether it has: (i) reviewed and discussed the audited financial statements with management; (ii) discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61; and (iii) received from the auditors disclosures regarding the auditors' independence required by Independent Standards Board Standard No. 1, and discussed with the auditors the auditors' independence. The audit committee report must also include a statement that, based on the above, the audit committee recommends to the company's Board of Directors that the audited financial statements be included in the company's annual report. These disclosures must appear over the printed names of each audit committee member, which the SEC asserted "will emphasize for shareholders the importance of the audit committees' oversight role in the financial reporting process."

Audit Committee Charters

The new rules further require companies to disclose in their proxy statements whether their audit committee is governed by a charter, and if so, to include a copy of the charter as an appendix to the proxy statement at least once every three years. The SEC asserted that this requirement "should help shareholders assess the role and responsibilities of the audit committee."

Audit Committee Members' Independence

Pursuant to the new SEC rules, companies whose securities are listed on the NYSE or AMEX or quoted on Nasdaq and that have a non-independent audit committee member must disclose the nature of the relationship that makes that individual not independent and the reasons for the Board's determination to appoint that individual to the audit committee. Small business issuers are not required to comply with this requirement. Moreover, the new rules require companies to disclose whether the audit committee members are independent, as defined in the applicable listing standards. Companies whose securities are not listed on the NYSE or AMEX or quoted on Nasdaq must disclose in their proxy statements whether, if they have an audit committee, the members are independent as defined in the NYSE's, AMEX's or NASD's listing standards, and which definition was used.

Safe Harbors

The new rules also provide safe harbors for the new proxy statement disclosures to protect companies and their directors from certain liability under the federal securities laws. Specifically, disclosures made pursuant to the new rules will not be considered "soliciting materials" "filed" with the SEC, and thus will not be subject to the antifraud provisions of the Securities Exchange Act of 1934 ("Exchange Act") with regard to public filing and proxy statements, except to the extent that the company specifically requests that its disclosures be treated as soliciting material, or specifically incorporates the disclosures by reference in a document filed under the Securities Act of 1933 or the Exchange Act.

New SRO Audit Committee Rules

The NYSE, AMEX, and NASD also have adopted new rules governing the composition and responsibilities of audit committees of corporate boards of directors. Further information on these new rules, and how they compare and contrast with the SEC's new rules, is available upon request to a member of the Firm.

Audit Committee Disclosure SEC Release No. 34-42266, 64 Fed. Reg. 73389 (Dec. 30, 1999)(to be codified at 17 C.F.R. pts. 210, 228, 229 and 240); Order Approving Proposed Rule Change by NYSE, Inc. Amending the Exchange's Audit Committee Requirements, SEC Release No. 34-42233, 64 Fed. Reg. 71529 (Dec. 21, 1999); Order Approving Proposed Rule Change by AMEX, LLC. Amending the Exchange's Audit Committee Requirements, SEC Release No. 34-42231, 64 Fed. Reg. 71518 (Dec. 21, 1999); Order Approving Proposed Rule Change by NASD, Inc. Amending Its Audit Committee Requirements, SEC Release No. 34-42231, 64 Fed. Reg. 71523 (Dec. 21, 1999).

  • Compliance Phase-In Dates For New SEC Audit Committee Disclosure Rule

  • New SEC Requirement

  • Mandatory Compliance Deadline

  • Pre-filing review of quarterly financial statements

  • Required for all forms required to be filed for fiscal quarters ending on or after March 15, 2000

  • Audit committee report in proxy statements

  • Required for all proxy and information statements relating to votes of shareholders occurring after December 15, 2000

  • Audit committee charter disclosure and attachment to proxy statements

  • Required for all proxy and information statements relating to votes of shareholders occurring after December 15, 2000

  • Disclosure of independence of audit committee members

  • Required for all proxy and information statements relating to votes of shareholders occurring after December 15, 2000