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Update: The New Audit Committee Rules

In December 1999, the WG&M Corporate Department and the Corporate Governance Department jointly published a "Special Edition" of the WG&M Corporate Charter covering the new audit committee rules arising out of the recently approved changes to the NYSE and NASD standards, the SEC disclosure requirements and the Auditing Standards Boards Statements on Auditing Standards. The Special Edition provides two short "checklists" - one for NYSE listed companies and one for Nasdaq/Amex listed companies - each of which delineates items that need to be considered to meet the new disclosure and listing standards. It also includes a sample "bare bones" charter which complies with the new rules as well as an article which discusses in greater detail the nature and application of the new rules.

Subsequent to that publication, the new SEC and SRO rules were made publicly available and clarified several items discussed in the Special Edition. We therefore wanted to advise you of the following:
  • The final SEC Audit Committee Disclosure Rules (Release No. 34-42266, available December 23, 1999) will require a review of interim financial statements by the independent auditors beginning in the first fiscal quarter of 2000 rather than the second fiscal quarter. Pursuant to newly adopted accounting profession standards (SAS 90), beginning the first fiscal quarter of 2000, the auditors will also be required to "attempt" to engage the audit committee - or at least its chairman - in dialogue about the auditors' judgments on the quality, not just the acceptability, of the company's financial statements. As noted in the Special Edition, although the audit committee will not be "required" to participate in this quarterly discussion with the auditors, the audit committee should carefully consider whether it would want to be in the position of having "refused" to speak with the auditors - especially in the event irregularities were to have occurred.
  • In addition to disclosures with respect to any director who is not independent but was appointed under the "exceptional and limited circumstances" exceptions of the SROs, the new rules also will require companies to disclose in their proxy statements whether the audit committee members are "independent" as defined in the applicable listing standards.
  • In discussing the new disclosure requirements, the SEC suggests that the SRO requirements regarding the independence of audit committee members need not be complied with for eighteen months after adoption. As noted in the Special Edition, only the NASD and the AMEX (Release Nos. 34-42231 and 34-42232, dated December 14, 1999) provide the 18-month grace period for all new audit committee structure and membership requirements. The NYSE transition period only "grandfathers" audit committee members until they stand for reelection or are replaced as directors. The NYSE 18-month grace period only applies to: (1) companies having less than three members on their audit committee; and (2) the requirement that at least one member of the audit committee have accounting or related financial management expertise (SR-NYSE-00-04). Thus, NYSE companies electing new directors in the upcoming proxy season must select directors who comply with the independence and financial literacy requirements under the new rules.
  • The NYSE has also codified its existing policy on the timing of audit committee requirements for IPOs by specifying that companies listing in conjunction with their initial public offering (including spin-offs and carveouts) will be required to have two qualified audit committee members in place within three months of listing and a third qualified member in place within twelve months of listing.
  • Upon special request, the NASD may allow a three month grace period for IPO issuers to comply with the new independence, financial literacy and financial expertise requirements as well as the addition of a third audit committee member.

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