Securities Alert: February 2000

SEC ADOPTS NEW AUDIT COMMITTEE RULES

In response to the Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees, the SEC has adopted rules requiring a more thorough review of periodic financial statements and the disclosure of additional information in filings made by reporting companies.

The rules do not require that a reporting company have an audit committee. Instead, the SEC is requiring that independent auditors review interim financial statements in quarterly reports on Form 10-Q or 10-QSB.

Additionally, the requirements of Item 302(a) of Regulation S-K (fiscal year end reconciliation and descriptions of any adjustments to the quarterly information previously reported in a Form 10-A for any quarters) have been extended to a wider range of companies. All companies (except small business issuers filing on small business forms), regardless of the size of the company or public float, that have securities registered under Sections 12(b) or 12(g) of the Exchange Act must comply with the requirements of Item 302(a). Proxy statements must include the following disclosures:

• If the members of the audit committee are "independent" within the listing standards or proposed amendments to the listing standards of the NASD, NYSE or AMEX. Companies not listed on an exchange or quoted on NASDAQ must provide this disclosure as well, and indicate which definition of "independence" (NASD, NYSE or AMEX) was used. Companies are also required to provide certain information regarding any director on the audit committee who is not "independent."
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• Whether an issuer's audit committee has adopted a written charter. If a written charter has been adopted, it must appear as an appendix to the proxy or information statement at least once every three years. No disclosure is required in connection with whether the company has complied with the charter.
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• The audit committee report. The report must state whether the audit committee has (i) reviewed the audited financial statements; (ii) discussed the audited financial statements with management; (iii) discussed the matters that are required to be discussed by the Statement on Auditing Standards No. 61 with the independent auditor [1]; (iv) received certain statements from the independent auditor regarding the auditor's independence as required by the Independence Standards Board Standard No. 1; and (v) discussed with the independent auditors their independence.

Additionally, audit committee reports must include a statement by the audit committee that indicates whether, based on the above discussions and review, the audit committee recommended that the audited financial statements be included on Forms 10-K or 10-KSB (as applicable) for the last fiscal year for filing with the SEC.

The proposals create "safe harbors" for the additional information required to be disclosed. Specifically, the additional disclosures are not considered "soliciting material" "filed" with the SEC, subject to Regulation 14A or 14C or to the liabilities section of Section 18 of the Exchange Act.

The new rules become effective on January 31, 2000, and must be complied with as follows:

• Reviews of interim financial information by independent auditors must be obtained for Forms 10-Q or 10-QSB to be filed for fiscal quarters ending on or after March 31, 2000.
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• New proxy and information disclosure requirements must be complied with for all proxy and information statements relating to votes of shareholders occurring after December 15, 2000.
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• Companies who become subject to Item 302(a) of Regulation S-K as a result of the new rules must comply with its requirements after December 15, 2000.

[1]. The American Institute of Certified Public Accountants' Statement on Auditing Standards No. 61 requires that audit committees discuss the following matters with the company's independent auditors: (i) the level of the independent auditor's responsibility under generally accepted auditing standards; (ii) the accounting methods used, including information regarding methods used to account for significant unusual transactions; (iii) the process used by management in formulating sensitive estimates, the auditor's conclusions regarding the estimates and the basis for the auditor's conclusions; (iv) adjustments arising from the audit that could have a significant effect on the company's financial reporting process; (v) the auditor's responsibility for other information in documents, such as "Management's Discussion and Analysis of Financial Condition and Results of Operations," containing audited financial statements; (vi) disagreements with management that could be significant to the financial statements or auditor's report; (vii) whether management consulted with other auditors or accountants and the auditor's opinion regarding the matters involved in such consultation; (viii) major issues discussed with management in connection with the initial or recurring retention of the auditor; and (ix) serious difficulties encountered in dealing with management related to the performance of the audit.