Corporate Governance Seminar. Seminar Summary of Richard Langan of Nixon Peabody LLP

With regard to the "Pre-Approval" requirement transitional rules (section 202), Mr. Langan noted:

• Audit services that are subject to engagements in effect before May 6, 2003 do not need to be approved.
  
  

• Permitted non-audit services subject to engagement before May 6, 2003 can continue, but need to be pre-approved before May 6, 2004.
  
  

Further, Mr. Langan advised companies to adopt policies and procedures for pre-approval of audit services and non-audit services, and to assess problematic services on a case-by-case basis. In adopting policies and procedures, the first step is to inventory audit and non-audit services being undertaken by a companyís auditors, and look at the costs associated with each service item. Next, the company should determine the technique to use for pre-approval of services: by broad category of services, services up to certain dollar limits, services with regard to time periods, or a combined approach.

Whatever the approach, preapproval polices and procedures must have some specificity attached to them, so that one can clearly say that services were pre-approved in accordance with the rules. Some pre-approval issues worth noting, according to Mr. Langan:

• Companies must examine tax services closely, especially where potential tax avoidance is associated with services.
  
  

• Though a de-minimus exception exists with regard to pre-approval of audit and non-audit services, it is available in such a narrow set of circumstances that, if at all possible, companies should not rely on the exception.
  
  

According to Mr. Langan, the audit committee "Financial Expert" requirement is fairly straightforward. Only one requirement for service as a financial expert on an audit committee is potentially problematic, especially for smaller companies: the requirement that the expert have experience preparing, auditing, or evaluating financial statements of companies with comparably complex accounting issues.

With regard to the prescribed means of a financial expertís experience or education, Mr. Langan explained that the "other relevant experience" category must be listed and described in the proxy statement if it is relied upon. One way to address this requirement in a way that avoids a large number of SEC comments is to include in the audit committee charter those attributes that would be viewed by the companyís audit committee as satisfying the requisite level of experience and expertise.

As to independence of the audit committee, Mr. Langan pointed out several issues that arise:

• "Family members" are now described more broadly, and it has become harder for companies to do due diligence before reaching out to potential audit committee members with respect to "in-laws."
  
  

• Smaller companies may have problems with the "affiliated person" aspect of the rules, and in determining whether transactions involving VC funds constitute compensation.
  
  

• When using retired executives on audit committees, it can be difficult to determine whether they qualify as independent if they are still receiving benefits under defined benefit plans.
  
  

Richard Langan, Business Practice Group Leader at Nixon Peabody LLP, shared his insights on counseling the audit committee with attendees of FindLawís Corporate Governance seminar in New York. Mr. Langan observed that although corporate governance rule-making in light of Sarbanes-Oxley has taken some time for companies to synthesize, most companies have found that the changes can be incorporated into dayto- day activities at the board and audit committee level.