Audit Committee Financial Expert Casts a Wide Net

Here's a tip from the sixth edition of our popular publication The Public Company Handbook, which is an easy-to-read guide that provides practical insights regarding legal and other board management issues facing public—or soon-to-be-public—companies.

The SEC has adopted a pragmatic definition of Audit Committee financial expert. Investment bankers, venture capital investors, stock analysts and others may qualify, along with finance professionals. An Audit Committee financial expert is a person who has all five of the following attributes:

1. Understands GAAP and financial statements;

2. Has the ability to assess the application of GAAP to accounting for estimates, accruals and reserves;

3. Has experience:

• Preparing, auditing, analyzing or evaluating financial statements with accounting issues comparable in breadth and complexity to those that can reasonably be expected to be raised in the company's financial statements; or

• Actively supervising someone engaged in those activities;

4. Understands internal control over financial reporting; and

5. Understands Audit Committee functions.

The Board must determine that an Audit Committee financial expert has developed the five attributes through any combination of:

• Education and experience as a CFO, principal accounting officer, controller, public accountant or auditor performing similar functions;

• Experience actively supervising a person in those positions;

• Experience overseeing or assessing the performance of companies or public accountants regarding the preparation, auditing or evaluation of financial statements; or

• Other relevant experience that the Board determines to be adequate (and which it must publicly disclose).