The Securities and Exchange Commission has voted to adopt new corporate governance rules aimed at further protecting investors by placing new restrictions and new requirements on company audit committees.
The new rules, set to take effect no later than October 31, 2004 (July 31, 2005 for foreign issuers), prohibit stock exchanges from allowing a company to be listed if the company does not comply with the new procedures, which require that:
- Each member of the audit committee of the issuer must be independent according to the specified criteria in Sarbanes-Oxley.
- The audit committee must be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the issuer, and the registered public accounting firm must report directly to the audit committee.
- The audit committee must establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
- The audit committee must have the authority to engage independent counsel and other advisors, as it determines necessary to carry out its duties.
- The issuer must provide appropriate funding for the audit committee.
One of the contentious issues in Sarbanes-Oxley is the definition of "independence" of audit committee members. The new rules adopted by the SEC further define what that really means.
- To be considered independent, audit committee members must be barred from accepting any consulting, advisory or compensatory fee from the issuer or any subsidiary, other than in the member's capacity as a member of the board or any board committee.
- To be considered independent, an audit committee member must not be an affiliated person of the issuer or any subsidiary apart from capacity as a member of the board or any board committee.
The new rules will apply to both domestic and foreign listed issuers. It is important to note that, based on significant input from and dialogue with foreign regulators and foreign issuers and their advisers, several provisions, applicable only to foreign private issuers, have been included that seek to address the special circumstances of particular foreign jurisdictions. These provisions include
- allowing non-management employees to serve as audit committee members, consistent with "co-determination" and similar requirements in some countries;
- allowing shareholders to select or ratify the selection of auditors, also consistent with requirements in many foreign countries;
- allowing alternative structures such as boards of auditors to perform auditor oversight functions where such structures are provided for under local law; and
- addressing the issue of foreign government shareholder representation on audit committees.
The Commission voted to establish two sets of implementation dates for listed issuers. Generally, listed issuers will be required to comply with the new listing rules by the date of their first annual shareholders meetings after Jan. 15, 2004, but in any event no later than Oct. 31, 2004. Foreign private issuers and small business issuers will be required to comply by July 31, 2005.