SEC Expands Definition of 'Financial Expert'

Accountants and retired audit partners looking for seats on boards of directors may be disappointed to hear the Securities and Exchange Commission has expanded its proposed definition of "financial expert." This definition has proven to be one the most controversial aspects of the Sarbanes-Oxley Act.

Under the Sarbanes-Oxley Act, companies are required to disclose whether or not they have a "financial expert" on the audit committee of their board of directors. The SEC had initially proposed to define a "financial expert" as someone with experience in "preparing or auditing financial statements."

Companies objected to the proposed definition, saying it was so narrow it would be hard for them to find and recruit such people for their boards. The point is well-taken. Current audit partners would clearly meet the definition and have the broad range of knowledge needed to provide valuable advice, but many are prohibited by firm policies from serving on boards because it could pose a potential conflict of interests if the company were to consider changing auditors. These policies left only former and retired auditors available to be recruited under the definition initially proposed.

In response to the concerns expressed, the SEC changed the term to "audit committee financial expert" and expanded the definition to include persons with expertise in analyzing or evaluating financial statements with a level of complexity comparable to the companies on whose audit committees they serve. This change in the definition will open up the field and the pool of candidates. In signaling the change in plans, SEC Commissioner Cynthia Glassman told Bloomberg, "We want to make sure we capture luminaries like Warren Buffett, Alan Greenspan and Paul Volcker who have experience in understanding financials and accounting principles."

The Commission also adopted rules that will require companies to disclose in their annual reports whether or not they have adopted codes of ethics for chief executive officers and senior financial officers.

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