SEC Unveils Audit Committee Rules

Audit committees must be independent, oversee outside audit firms; must also put whistle-blower systems in place. Plus: Why are so many companies having trouble filing 10-Ks on time? And: Fleming files for Ch. 11.


The new audit committee regime has officially begun.

Under new rules adopted by the Securities and Exchange Commission, most public companies must now comply with the audit committee provisions of the Sarbanes-Oxley Act by the date of their first annual shareholders’ meetings after January 15, 2004. All publicly traded companies must comply no later than October 31, 2004. Certain foreign companies and small businesses must comply by July 31, 2005.

You’ll recall that the act heralded hefty new powers for board audit committees. Not the least of that clout will be the authority to hire, pay, and oversee the work of outside auditors. But the watershed legislation also contains some provisions aimed at making sure that a corporation’s committee members don’t have business ties to the company.

Under the new rules, the SEC bars national securities exchanges from listing the security of an issuer that falls short of these requirements:

  • Each audit committee member must be “independent.” That means a member can’t accept fees from the company beyond what he or she get paid for being a director or committee member. A member also can’t be an “affiliated person” of the company or any of its subsidiaries. (The SEC hasn’t yet posted a final definition of “affiliated” on its Web site.)
  • The audit committee must be directly responsible for appointing, compensating, retaining, and overseeing the work of outside auditors. It must also preside over registered public accounting firms performing “other audit, review or attest services” for the company. Further, the public accounting firm must report directly to the committee.
  • Audit committees must also set up procedures for complaints about accounting, internal accounting controls, or auditing matters. The procedures must include “confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.” (To read how some companies are coping with this requirement, read “Dial “M” for Malfeasance.”)
  • The committee must be in charge of hiring the outside lawyers and other advisers it needs to carry out its duties.
  • Companies must supply “appropriate” funding for the committee.

The SEC also provides some exceptions to the rules for “foreign private issuers.” The new rules, for instance, enable them to allow nonmanagement employees to serve as audit committee members. Such issuers can also let shareholders choose or ratify the choice of auditors.

The SEC will also let foreign private issuers use “alternative structures,” like boards of auditors, to oversee audits. (Such structures must be provided for under local law.) Decision makers of foreign private issuers are also free to consider whether they want to have foreign-government shareholders represented on their audit committees.

In case you’re keeping score at home, a company is a foreign private issuer if, for one thing, less than 50 percent of its voting securities are held by U.S. residents. There’s a choice of one of three other provisos: the majority of its directors and officers must not be U.S. residents or citizens; the majority of its assets must be located offshore; or its business must not be principally administered in the United States.

10-Ks: Late, Very Late

The deadline for filing personal income taxes is only 12 days away, which, of course, means one thing: a whole lot of request-for-extensions will soon be filed.

Apparently the same thing is happening in the corporate world. In fact, the number of companies filing requests for SEC extensions on 10-K filings jumped 14 percent, to 2,171. That’s up from a previous high of 1,903 in 2000, USA Today reported, citing figures supplied by

Among the reasons given by tardy filers: accounting investigations and haggles with workers, vendors, and creditors. The auditors of at least one company are having trouble getting their hands on needed prior-year audits by the defunct Arthur Andersen LLP.

One late filer, Gateway, is in a particular snarl. Part of the PC maker’s delay stems from an SEC probe mostly related to the company’s 2000 financial statement, say Gateway executives. But most of the lag stems from the company’s review of its accounting for bundled AOL Internet services in 2000 and the first quarter of 2001.

The computer company is revising its net sales and cost of goods sold in each quarter for the year ended December 31, 2000, and for the first quarter of 2001. The revision is related to how the company accounted for bundled AOL Internet services, which it previously had reported on a gross basis. Management now thinks it’s more appropriate to present such amounts on a net basis.

Fleming Files for Bankruptcy

Sometimes there’s an interesting subtext to a request for a 10-K filing extension. Last week, for instance, Fleming Cos. asked for a 15-day extension to restate financial statements and related disclosures filed with the SEC. Ongoing assessment of these issues and related audit and compliance committee probes hadn’t yet been completed, the company’s management noted.

Well, the SEC did get its filing from the grocery distributor—but it wasn’t a 10-K. Instead, Fleming filed an 8-K on Tuesday informing the commission of an unexpected event: the food distributor had filed voluntary petitions for relief under Chapter 11 of the bankruptcy code.

More news came yesterday, when, according to Reuters, Fleming executives said the company had secured a commitment for $50 million in funding to keep its business running until it can get more capital.

The bankruptcy filing came less than two months after Fleming lost a $4.5 billion contract to distribute food to the stores of Kmart Corp., which is also involved in bankruptcy proceedings. In the interim, a previously announced informal inquiry by the SEC was elevated to a formal investigation of the company.

Last November, when Fleming executives first acknowledged the informal probe, they said the investigation was related to press reports of Fleming’s vendor-trade practices and its previously reported second-quarter 2001 earnings and 2002 earnings.

In March, CEO Mark Hansen resigned.

Curbing SARS Exposure

Corporate managers are acting quickly to manage the health risks posed by the recent outbreak of severe acute respiratory syndrome (SARS) cases. The quick solution? Curb travel to Asia.

Indeed, 27 percent of 180 organizations responding to a new Business Travel Coalition survey are banning travel to Asian countries. About 8 percent are thinking about a ban. The participating U.S., Canadian, and European companies average 31 round trips to Asian countries per month.

All the organizations banning Asian travel have stopped trips to Hong Kong. Most have halted flights to Singapore (84 percent), China (82 percent), and Vietnam (61 percent).

The response roughly tracks the spread of SARS, an extremely contagious form of pneumonia. To date, the highest numbers of cases have been recorded in China (1,190, including 426 deaths), Hong Kong (708, 16), and Singapore (95, 4), according to the Centers for Disease Control. Health authorities report that they are investigating 72 cases of suspected SARS in the United States.

Airlines in southeast Asia, including Cathay Pacific and Singapore Air, have reportedly cut their number of flights in response to the decrease in business travel to the region.

Short Takes

• Jacques M. Croisetiere has been named CFO and senior vice president of Rohm and Haas Co. Croisetiere, a vice president, European regional director, and business director for process chemicals, will replace Bradley J. Bell. Bell announced that he’s resigning next month.

• Jim Dore, corporate controller of Bitstream, a developer of font technology, has been promoted to vice president and CFO. Dore has been working closely with Anna Chagnon. Besides being Bitstream’s president and chief operating officer, Chagnon had been CFO since August 1998. She will continue as president and COO.

• Christi Harlan, the SEC’s director of public affairs, is leaving after what can be described as 15 fairly turbulent months on the job. Among other things, Harlan acted as commission spokesperson during the flap over William Webster’s ill-fated appointment to head the Public Company Accounting Oversight Board (PCAOB). Harlan’s new post? Public affairs director for—you guessed it—the PCAOB.

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