What is a NYSE Audit Committee?
The NYSE Audit Committee, as required by the New York Stock Exchange, is a vital component in the structure of publicly listed American companies. This committee, comprised of board members of the listed company, brings expertise and oversight to the financial reporting process, proving its value over the course of years and decades as a key element in corporate governance.
Essentially, NYSE audit committees operate with the end goal of holding guarantee by legally mandated best practices for financial reporting on the part of the company audited. Audit committees are thus responsible for ensuring the preparation and truthfulness of public statements regarding the state of a company’s finances. In this way , the NYSE audit committee acts as a watchdog, protecting the shareholders and the general public.
With these intentions, audit committees dictate, or at the very least influence, certain procedures that the company follows with regard to finance, accounting and governance. They may choose to implement measures including selection of external auditors, and areas of risk assessment.
The actual responsibilities of audit committees are to keep records of full adequacy, accuracy and compliance with certified tax guidelines and securities regulations. AUDIT COMMITTEES ARE TASKED WITH ENSURING THE PREPARATION AND TRUTHFULNESS OF PUBLIC STATEMENTS REGARDING THE STATE OF A COMPANY’S FINANCES.
Major Requirements for NYSE Audit Committees
NYSE-listed companies must have an audit committee, as defined in the NYSE listing standards. Each audit committee is required to adopt a formal charter that describes its responsibilities. While the form of the charter is not specified, it must specify the following: 1) the committee’s purpose; 2) its authority and responsibilities; 3) how it will conduct its proceedings; and 4) the source of its authority. The audit committee and its charter must, however, comply with the Sarbanes-Oxley Act of 2002 (described below). Current NYSE Rule 303A(10)(B) requires, for purposes of compliance with SOX 301, that the audit committee charter _______________________ (only apply if issuer is a foreign private issuer). The audit committee must consist of three or more (A) directors, (B) all of whom must be independent. At least one member must be an "audit committee financial expert" as defined under Rule 401(h) of Regulation S-K. Rule 301B(c) of the NYSE requires at least one member of the committee to meet the audit committee financial expert criteria.
Audit Committee Member Requirements
Pursuant to the requirements of applicable law, rules or regulations, the audit committee must be composed of members that are either: subject to significant exemptions or exceptions discussed below, the listed criteria for membership in the audit committee would be applied but in some cases may be waived, most likely after consultation with the company’s legal counsel. For purposes of these criteria, a "controlled company" is defined under the NYSE listing rules as any company where more than 50 percent of its voting power is held by another company or group of companies. "Controlled Companies" are not required to have a majority independent audit committee even if they are listed but may not be found to qualify as "foreign private issuers", a designation that would provide significant reduced burdens for an issuer. In order to generally qualify as an "independent" audit committee member, a member must not have any relationship that would interfere with the exercise of independent judgement in carrying out the responsibilities of a director according to the board of directors’ business judgment. Of course, there will be a presumption that a director who satisfies the criteria above should be considered independent but this a rebuttable presumption and may be overcome by the board of directors. The audit committee must have at least one member who qualifies as a financial expert and who meets the educational requirements of Section 407 of the Sarbanes-Oxley Act of 2002. A "financial expert" is a person who has had extensive experience in: but no "financial expert" need be a current member of an issuer’s audit committee.
Audit Committee Responsibilities
In addition to the functions which the SEC rules impose upon audit committees, New York Stock Exchange Rule 303A.07 designates the following as the responsibilities of the audit committee of a listed company:
- (1) appointing or replacing the independent auditors, approving the compensation of the independent auditors and pre-approving all audit and non-audit services to be provided by such independent auditors and establishing policies and procedures for the engagement of outside auditors for the purpose of rendering permissible services.
- (2) reviewing the independence of the independent auditors and discussing with the independent auditors and with management the scope of the audit and the independent auditors’ letter of audit scope and reasons therefore and recommending to the Board that the audited financial statements be included in the annual report on Form 10-K;
- (3) reviewing the adequacy of the company’s system of internal controls with the independent auditors, the company’s internal auditors and management; discussing significant financial risk exposures and steps taken to monitor and control such exposure; reviewing the process to review significant issues regarding accounting principles and auditing and to provide for resolution of disagreements between management and the independent auditors regarding financial reporting;
- (4) establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and for confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters;
- (5) obtaining from the independent auditors an annual report describing the independent auditor’s internal quality-control procedures, any material issues raised by the most recent internal quality-control review of the audit firm, or by any review of the firm by government or professional authorities, within the preceding five years, together with the independent auditor’s related quality-control review report and an evaluation by the issuer’s audit committee of the audit firm’s qualifications, processes and performance;
- (6) meeting separately and periodically with management, with the internal auditors and with the independent auditors to discuss certain matters that affect the financial reporting of the issuer;
- (7) reviewing and approving the code of business conduct and the issuer’s procedures to encourage compliance therewith;
- (8) reviewing legal and regulatory matters that may have a material impact on the financial statements of the issuer and related compliance policies and programs; and
- (9) preparing (or the full Board of Directors may designate the audit committee to prepare) an annual report for inclusion in the issuer’s proxy statement for its next annual shareholder meeting, which … must describe (a) if applicable, that the audit committee adopted a charter that has been approved by the board, which charter can provide as follows: The audit committee shall be directly responsible for the appointment, compensation and oversight of the work of any registered public accounting firm employed by the issuer for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the issuer and each such registered public accounting firm shall report directly to the audit committee; (b) the audit committee has reviewed and discussed the issuer’s audited financial statements with management, and discussed with the independent auditors the matters required by AS 61 (Communications with Audit Committees); and (c) based on the review and discussions referred to in clause (b), the audit committee recommended to the board that the audited financial statements be included in the issuer’s annual report on Form 10-K for filing with the SEC.
Audit Committee Regulations and Best Practices
The audit committee of a listed company shall require the company to adopt and disclose a code of business conduct and ethics for senior financial officers and to provide for the prompt public disclosure of any waivers of the code granted to these individuals. The NYSE expects the company to adopt a code applicable to all employees, however, and reference to a posted code is generally acceptable. The company’s code must satisfy the seven minimum requirements enumerated by the SEC rules, and the NYSE added enhanced disclosures in its rules. First, the code must contain provisions that encourage the prompt internal reporting of violations of the code to appropriate person(s) identified in the code and provide for the confidentiality of such reports. Second , the code must also contain provisions that set forth compliance standards and procedures to promote compliance with the code, and the code must be effective in practice. Third, the code must also provide for monitoring by the board of directors or another board committee of the company’s compliance with the code. The company must also have a system in place for the granting of waivers of the code by the board of directors or an appropriate committee thereof.
In adopting and implementing their code of business conduct and ethics, audit committees of NYSE-listed companies must ensure that sufficient procedures are adopted to meet the mandated SEC seven elements that requires the code to:
Common Challenges for Audit Committees
In addition to the requirement that the audit committee members be independent, they also face a number of potential challenges to fulfill their duties. The regulatory environment continues to evolve, adding potentially burdensome procedures, compliance mechanisms and disclosure requirements. Increased regulations may require the audit committee to review more disclosures, increasing the number of decisions the audit committee needs to make throughout a year.
More complex financial statements and additional disclosures in regulatory filings create additional areas of responsibility for the audit committee to oversee. The audit committee may also be called on to oversee cybersecurity concerns, within the framework of an oversight mechanism that best suits the company, particularly in light of the SEC’s recent proposed disclosure rules for cybersecurity incidents.
Updates to NYSE Audit Committee Rules
Over the past few years, the NYSE has made incremental adjustments to its requirements for audit committees. The changes have focused primarily on clarifying existing rules and the roles of audit committee members and financial experts. For instance, recently codified clarifications to Section 303A(c)(2) remove some ambiguity by specifying that a financial expert should not be deemed independent if any executive officer or "affiliate" of the issuer was a member of (1) the board of directors or equivalent body of the issuer and was a member of (2) the audit committee at the same time as the applicable financial expert.
In a similar vein, the NYSE has updated its corporate governance reporting requirements (Section 303A.09) to state that if a company has not named a financial expert to its audit committee during its most recent fiscal year, it must certify that it did not "illicitly" agree to a waiver of this requirement "to pursue a temporary exemption." NYSE continues to clarify that even though it does not require (financial) experts to sit on its audit committee, it does expect its audit committee to understand and review both financial and non-financial information presented to them by auditors and others.
Final Thoughts: What Lies Ahead for Audit Committees
The evolution of corporate governance requirements is a constant in the US. As technology enhances the capabilities for data analytics, artificial intelligence and other advances in transparency, the evolution of the role and responsibilities for audit committees will also increase. Companies will be further incentivized to consider technology solutions to help meet their audit committee requirements. As public companies look to IPOs in other countries, they will need to better understand both their current responsibilities and the expected evolving landscape of those requirements and how audit committees may be involved in those processes.
The focus of domestic and SEC regulators, along with the expectation of shareholders will push audit committees to be more proactive in assessing risks not only on a quarterly or annual basis but also in real time. The goal is to be more efficient in the assessment and learning from audit committee activities . I expect that we will see even more discussion surrounding these topics at conferences and in discussions with board members and audit committee members.
Likewise, the international community will continue to assess both the independence of audit committees and the impact of regulatory requirements on their activities. In the past year we have seen changes in the corporate governance structures in China, for example, in the year to come we can expect to see discussions about the impact of these use of differing governance structures outside of the US and its impact on potential IPOs by domestic issuers and foreign private issuer.
Finally, the heightened focus on the types of information to disclose, either in the separate audit committee report, or the disclosure in the proxy statement about the audit committee activities and independence, is and will continue to be a priority as well.