Financial Fitness Test

The Audit Committee will soon cease to be the dumping ground for green board members.

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The Audit Committee will soon cease to be the dumping ground for green board members. The Securities and Exchange Commission approved new rules that will require each committee member to be “financially literate” and provide a seat for at least one member who has accounting expertise. But, as audit-committee responsibility and the corresponding fear of liability increase, companies may find it tougher to find new members.

The new rules, which were approved this past December, will require every member to have “a basic understanding of accounting and financial reporting–enough to recognize issues and ask relevant questions,” says Daniel Doheny, partner in charge of KPMG LLP’s Audit Committee Institute.

Finding people with significant experience in finance or accounting may prove challenging. “Smaller or midsized companies that lack the sex appeal of the dot-coms, or companies in financially troubled industries, may have a hard time,” notes Doheny. “Knowing that the risk is increasing, an expert is probably going to be more selective.”

Effective this December 15, audit committees will be required to officially sign off on the quality of the audit in a report that recommends that the financial statements be included in the 10K.

The additional responsibility is compelling companies to raise their fees for audit committee members. Culp Inc., a $500 million (1999 revenues) upholstery-fabric maker in High Point, N.C., recently raised its annual board-member stipend to $15,000, with an additional $5,000 to sit on the audit committee. That’s more pay than any other committee, says CFO Phillip Wilson, because of the amount of work involved. Culp just recruited a new board member with a strong finance background, who—no surprise–ended up on the audit committee.

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