Attached files
Audit Committee Charter
Exhibit 14.3
June 22, 2017
ARRESTAGE INTERNATIONAL, INC
BOD Resolution: Audit Committee and Committee Charter
RESOLVED, that the Board of Directors
(the "Board") of Arrestage
International, Inc. (the "Company") hereby
establishes, pursuant to the authority granted under 3.10 (c)
(“Authority”) of
the Nevada Corporation 3.10 (a) (“Designation and Appointment”) of
the By-laws of the Company, an audit committee of the Board (the
"Audit
Committee"), whose purpose and power shall be, to the extent
permitted by law, to (a) retain, oversee and terminate, as
necessary, the auditors of the company, (b) oversee the company's
accounting and financial reporting processes and the audit and
preparation of the company's financial statements, (c) exercise
such other powers and authority as are set forth in the charter of
the Audit Committee of the Board, substantially in the form of the
draft hereof dated September 24, 2014 and (d) exercise such other
powers and authority as shall from time to time be assigned thereto
by resolution of the Board;
RESOLVED, that Dr. Roy Shapiro and Mr. Larry Barken and
are hereby appointed as members of the Audit Committee, to hold
such position at the pleasure of the Board until the annual meeting
of the Board following the next annual meeting and until their
respective successors are appointed and qualified or until their
earlier death, disqualification, resignation or
removal;
RESOLVED, that the Board has determined
that each of the members of the Audit Committee designated above is
independent pursuant to the required standards set forth in
Rule 10A-3(b) of the
Securities Exchange Act of 1934, as amended, based on an evaluation
of the relationships between the Company and each of the members.
In its review, the Board noted that Dr. Roy Shapiro –
Chairman, and Mr. Larry Barken and determined that this does not
affect their independence for audit committee
purposes;
RESOLVED, that the Board has determined
that each of the members of the Audit Committee designated above is
independent, pursuant to the independence tests under Section 303A.02 of the New York Stock
Exchange (“NYSE”) Listed Company Manual, based on
evaluations conducted in accordance with Section 303A.02, and is financially
literate in accordance with the additional audit committee
requirements of Section
303A.07. In its review, the Board noted that that Dr. Roy
Shapiro and Mr.Larry Barken both have the appropriate skill sets to
be named as members of such committee.
RESOLVED, that the Board has determined
that each of the members of the Audit Committee designated above
can maintain independent, and perform duties hereunder in a
diligent manner. In addition, the Board has determined that members
of the Audit Committee designated are able to read and understand
fundamental financial statements, including the Company’s
balance sheet, income statement, and cash flow
statement;
RESOLVED, that Dr. Roy Shapiro is hereby
appointed as the chairman of the Audit Committee to hold such
position at the pleasure of the Board until the annual meeting of
the Board of Directors following the next annual meeting of the
stockholders of the Company and until his respective successor is
appointed and qualified or until his earlier death,
disqualification, resignation or removal;
RESOLVED, that Mr. Larry Barken is
designated an "audit committee
financial expert" as defined by Item 407(d)(5) of Regulation S-K under
the Securities Act of 1933, as amended, based on the Board's
evaluation of his knowledge of accounting, qualifications and
experience and has appropriate accounting or financial management
expertise in accordance with the additional audit committee
requirements of Section
303A.07 OR experience
or background which results in his financial sophistication in
accordance with the additional audit committee requirements of Rule
5605(c)(2)(A).
RESOLVED, because of the nature of
Arrestage as a smaller reporting company and the structure of the
current Board as “interested”, The audit committee
shall review and report on audits provided by an independent
accounting firm, and such report shall be attached to Committee
minutes and submitted to the BOD as a whole and attached to BOD
meeting minutes.
RESOLVED, that the Audit Committee
Charter, substantially in the form of the draft thereof dated June
22, 2017, is hereby approved and adopted, it being understood that
the Audit Committee may from time to time make changes or other
modifications to the Audit Committee Charter as the Audit Committee
deems necessary or advisable, subject to the approval of the
Board;
RESOLVED, that in connection with the
performance of its duties, the Audit Committee shall have
unrestricted access to, and assistance from, the officers,
employees and independent auditors of the Company, and shall be
furnished with such resources and support from the Company as the
Audit Committee shall deem necessary;
RESOLVED, that the Audit Committee shall
have the authority to employ, at the expense of the Company, such
counsel, experts, and other professionals as the Audit Committee
shall deem appropriate from time to time.
The subjects
discussed at the Board of Directors meeting in relation to the
formation of the audit committee are stated herein:
The directors
also reviewed whether:
(1) Each
Prospective Member accepted or is accepting directly or indirectly
any consulting, advisory or other compensatory fee from the Company
or any of its subsidiaries.
(2) Evaluated
each Prospective Member is affiliated with the Company, a
subsidiary of the Company or any other affiliate of the Company. In
its review, the directors noted that due to the structure of the
Company Board of Directors and the status of a smaller reporting
Company, that there is some inherent “interested party
consideration” for all Board members. As such, the BOD notes
this potential conflict and thus will rely not only on the Audit
committee but also the independent accounting reporting provided by
outside firms, consultants, and experts, and shall provide such
reports, in addition to their own opinions and
analysis.
(3) The
directors then turned to an evaluation of each Prospective Member's
knowledge of accounting, qualifications and experience. Following
this extensive evaluation and review, the directors affirmatively
determined that Dr. Roy Shapiro is qualified for such position and
are financially literate. The directors also determined that Mr.
Larry Barken satisfies the definition of "audit committee financial
expert" as defined by Item 407(d)(5) of Regulation S-K and has
appropriate accounting or related financial management expertise
pursuant to Section 303A.07 of the NYSE Listed Company
Manual.
(4) The
directors then turned to consideration of the members of the Audit
Committee and an evaluation and determination of the independence
and eligibility of the directors to be appointed to serve on the
Audit Committee ("Prospective Members").
This discussion included an evaluation of the relationships between
each Prospective Member and the Company, including whether any
relationships were of the types precluded by Rule 5605(a)(2) of the
NASDAQ Listing Rules.
Following
this extensive evaluation and review, the directors affirmatively
determined pursuant to the definition of independence under Rule
5605(a)(2) of the NASDAQ Listing Rules, that the Directors are not
completely independent. Despite this independence determination,
the directors determined that it is in the best interests of the
Company and its shareholders for Dr. Roy Shapiro and Mr. Larry
Barken to be members of the Audit Committee and that he would be
eligible to serve on the Audit Committee since they satisfies the
other requirements. In order to comply with the Independence rules;
the Board of Directors will rely on independent experts, legal
advisors, and accounting firms reports (in full as written) in
addition to the committee analysis.
Because of the need for this formal committee, and the competence
of the persons named herein, the board has authorized this
committee and will take its recommendations in addition to the full
review of independent reporting.
{Signature Page
Follows}
IN WITNESS WHEREOF, the undersigned directors accept this Audit
Committee Charter to better serve shareholder interest with regard
to Financial Accounting, Risk-Management, and Financial
Oversight.
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Appendix A
Audit
Committee Charter Members:
1)
Dr. Roy Shapiro
2)
Mr. Larry Barken
Appendix B
“SOX Documentation”
I. Background
The strength of the U.S. financial markets depends on investor
confidence. Recent events involving allegations of misdeeds by
corporate executives, independent auditors and other market
participants have undermined that confidence. In response to this threat to the U.S. financial
markets, Congress passed, and the President signed into law, the
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act")
which effects sweeping corporate
disclosure and financial reporting reform.
This release is one of several that the Commission is required to
issue to implement provisions of the Sarbanes-Oxley Act. In this
release, we adopt rules to implement the following two provisions
of the Sarbanes-Oxley Act:
●
Section
407, which directs us to adopt rules: (1) requiring a company to
disclose whether its audit committee includes at least one member
who is a financial expert; and (2) defining the term "financial
expert"; and
●
Section
406, which directs us to adopt rules requiring a company to
disclose whether it has adopted a code of ethics for its senior
financial officers, and if not, the reasons therefor, as well as
any changes to, or waiver of any provision of, that code of
ethics.
A. Audit Committee Financial Experts
1.
Title of the Expert
In the Proposing Release, we solicited comment as to whether we
should use the term "financial expert" in our rules consistent with
its use in Section 407 of the Sarbanes-Oxley Act, or whether a
different term such as "audit committee financial expert" would be
more appropriate. A number of commenters expressed a concern that
neither the term "financial expert" nor "audit committee financial
expert" accurately reflects the required experience and expertise
of the type of expert contemplated by Section 407 and our proposed
rules. Some noted that many of the key characteristics included in
our proposed definition of a financial expert relate to the
expert's accounting knowledge and experience in an accounting or
auditing position. One commenter therefore recommended that we use
the term "audit committee accounting expert." Other suggested terms
included "accounting expert," "audit committee member financial
lead" and "financially proficient director."
We agree that the term "financial" may not completely capture the
attributes referenced in Section 407, given the provision's focus
on accounting and auditing expertise and the fact that traditional
"financial" matters extend to capital structure, valuation, cash
flows, risk analysis and capital-raising techniques. Furthermore,
several recent articles on the proposals have noted that many
experienced investors and business leaders with considerable
financial expertise would not necessarily qualify as financial
experts under the proposed definition.14
We have decided to use the term "audit
committee financial expert" in our rules implementing Section 407
instead of the term "financial expert." This term suggests more pointedly that the
designated person has characteristics that are particularly
relevant to the functions of the audit committee, such as: a
thorough understanding of the audit committee's oversight role,
expertise in accounting matters as well as understanding of
financial statements, and the ability to ask the right questions to
determine whether the company's financial statements are complete
and accurate. The new rules include a definition of the term "audit
committee financial expert.
2.
Disclosure of the Number and Names of Audit Committee Financial
Experts
A substantial number of commenters opposed our proposal to require
a company to disclose the number and names of the persons that the
company's board determined to be audit committee financial experts.
Some were opposed on the ground that our proposed rules exceeded
the mandates of the Sarbanes-Oxley Act.
Much of the opposition stemmed from a
fear that the designation of an audit committee financial expert
may inappropriately suggest that the expert bears greater
responsibility, and therefore is subject to a higher degree of
liability, for audit committee decisions than other audit committee
members. Some commenters thought that identification of the audit
committee financial expert in the company's annual report would
exacerbate that problem and discourage qualified persons from
serving as such experts.
We have modified the proposals that would have required disclosure
of the number and names of audit committee financial experts
serving on a company's audit committee to more closely track the
language used in Section 407 of the Sarbanes-Oxley Act. Under the
rules that we are adopting, a company must disclose that its board
of directors has determined that the company either:
●
has
at least one audit committee financial expert serving on its audit
committee; or
●
does
not have an audit committee financial expert serving on its audit
committee.
A company disclosing that it does not have an audit committee
financial expert must explain why it does not have such an expert.
We continue to believe that disclosure of the name of the audit
committee financial expert is necessary to benefit investors and to
carry out the purpose of Section 407. Therefore, under the final
rules, if a company discloses that it has an audit committee
financial expert, it also must disclose the expert's name. We
believe that, in general, omission of the expert's name ultimately
would not result in the expert's identity remaining non-public. To
the extent that there are liability concerns, we believe that they
are best addressed by our inclusion of a safe harbor in our rules,
as discussed below.
The final rules permit, but do not require, a company to disclose
that it has more than one audit committee financial expert on its
audit committee. Therefore, once a company's board determines that
a particular audit committee member qualifies as an audit committee
financial expert, it may, but is not required to, determine whether
additional audit committee members also qualify as experts. Every
company subject to the audit committee disclosure requirements
would, however, have to determine whether or not it has at least
one audit committee financial expert; a company will not satisfy
the new disclosure requirements by stating that it has decided not
to make a determination or by simply disclosing the qualifications
of all of its audit committee members. Furthermore, if the
company's board determines that at least one of the audit committee
members qualifies as an expert, the company must accurately
disclose this fact. It will not be appropriate for a company to
disclose that it does not have an audit committee financial expert
if its board has determined that such an expert serves on the audit
committee.
3.
Disclosure of Independence of Audit Committee Financial
Experts
We proposed to require a company to disclose whether its audit
committee financial expert is independent of management. A number
of commenters opposed this disclosure requirement as unnecessary,
noting that Section 301 of the Sarbanes-Oxley Act mandates the
Commission to direct the self-regulatory organizations to prohibit
the listing of any company that does not require all of its audit
committee members to be independent. However, not all Exchange Act
reporting companies are listed on a national securities exchange or
association. We believe that
investors in these companies would be interested in knowing whether
the audit committee financial expert is independent of management.
Therefore, the final rules require a company to disclose whether
the person or persons identified as the audit committee financial
expert is independent of management.
In the proposing release, we defined "independent" by reference to
Section 10A(m)(3) of the Exchange Act
Several commenters noted that this
reference may cause some confusion because the securities laws
include different definitions of the term "affiliated," which is
part of the definition used in Section
10A(m)(3).
Therefore, to provide clarity, the
final rules refer to the definition of "independent" used in Item
7(d)(3)(iv) of Schedule 14A. This revision ensures that the term "independent"
is used consistently in our rules.
4.
Definition of "Audit Committee Financial Expert"
a. Proposed Definition of the Term "Financial Expert"
We proposed to define the term "financial expert" to mean a person
who has, through education and experience as a public accountant,
auditor, principal financial officer, controller or principal
accounting officer, of a company that, at the time the person held
such position, was required to file reports pursuant to Section
13(a) or 15(d) of the Exchange Act, or experience in one or more
positions that involve the performance of similar functions (or
that results, in the judgment of the company's board of directors,
in the person's having similar expertise and experience),
the following
attributes:
(1)
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An understanding of generally accepted accounting principles and
financial statements;
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(2)
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Experience applying such generally accepted accounting principles
in connection with the accounting for estimates, accruals, and
reserves that are generally comparable to the estimates, accruals
and reserves, if any, used in the registrant's financial
statements;
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(3)
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Experience preparing or auditing financial statements that present
accounting issues that are generally comparable to those raised by
the registrant's financial statements;
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(4)
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Experience with internal controls and procedures for financial
reporting; and
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(5)
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An understanding of audit committee functions.
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In addition, the proposed rule would have provided guidance to
companies by providing a list of factors to be considered in making
that evaluation, including:
●
The
level of the person's accounting or financial education, including
whether the person has earned an advanced degree in finance or
accounting;
●
Whether
the person is a certified public accountant, or the equivalent, in
good standing, and the length of time that the person actively has
practiced as a certified public accountant, or the
equivalent;
●
Whether
the person is certified or otherwise identified as having
accounting or financial experience by a recognized private body
that establishes and administers standards in respect of such
expertise, whether that person is in good standing with the
recognized private body, and the length of time that the person has
been actively certified or identified as having this
expertise;
●
Whether
the person has served as a principal financial officer, controller
or principal accounting officer of a company that, at the time the
person held such position, was required to file reports pursuant to
Section 13(a) or 15(d) of the Exchange Act, and if so, for how
long;
●
The
person's specific duties while serving as a public accountant,
auditor, principal financial officer, controller, principal
accounting officer or position involving the performance of similar
functions;
●
The
person's level of familiarity and experience with all applicable
laws and regulations regarding the preparation of financial
statements that must be included in reports filed under Section
13(a) or 15(d) of the Exchange Act;
●
The
level and amount of the person's direct experience reviewing,
preparing, auditing or analyzing financial statements that must be
included in reports filed under Section 13(a) or 15(d) of the
Exchange Act;
●
The
person's past or current membership on one or more audit committees
of companies that, at the time the person held such membership,
were required to file reports pursuant to Section 13(a) or 15(d) of
the Exchange Act;
●
The
person's level of familiarity and experience with the use and
analysis of financial statements of public companies;
and
●
Whether
the person has any other relevant qualifications or experience that
would assist him or her in understanding and evaluating the
registrant's financial statements and other financial information
and to make knowledgeable and thorough inquiries
whether:
o
The
financial statements fairly present the financial condition,
results of operations and cash flows of the company in accordance
with generally accepted accounting principles; and
o
The
financial statements and other financial information, taken
together, fairly present the financial condition, results of
operations and cash flows of the company.
b. Comments on Proposed Definition
The proposed definition of the term "financial expert" proved to be
the most controversial aspect of the proposals - more commenters
remarked on it than on any other topic addressed by the proposed
rules. Most of the commenters thought that the proposed definition
was too restrictive. Several expressed concern that many companies,
especially small ones, would have a difficult time attracting an
audit committee member who would qualify as an expert under the
proposed definition. Some of the corporate commenters were of the
view that they already have exemplary audit committees, despite the
fact that none of their current members would meet our proposed
definition of an expert. A few complained that companies may have
to sacrifice the diversity of their boards and nominate directors
who satisfy the audit committee financial expert definition even if
the company does not believe that these directors are best-suited
for the position.
Furthermore, several commenters debated the merits of defining an
audit committee financial expert as a person with strong accounting
credentials, given that an audit committee member's role is one of
oversight, rather than direct involvement in the company's
accounting functions, and suggested that the emphasis on technical
accounting expertise in the definition was misplaced. A few
commenters further argued that it is unnecessary to have a
financial expert serving on the audit committee because audit
committee members should have the discretion to retain experts with
specific financial expertise as they deem necessary or
appropriate.
Other commenters asserted that the proposed definition was more
restrictive than necessary to satisfy Congressional intent - they
noted that Section 407 of the Sarbanes-Oxley Act requires us, in
defining the term "financial expert," only to "consider" whether a
person has, through education and experience as a public
accountant, auditor, principal financial officer, comptroller,
principal accounting officer, or similar position, the four
attributes specified in the Act. These commenters argued that in
light of the Congressional directive only to consider the four
attributes, our proposed definition did not need to incorporate all
of them, or even any of them. Some commenters believed that a
single member of the audit committee should not have to possess all
of the required financial expert attributes so long as the members
of the audit committee collectively possess these attributes.
Others suggested various permutations such as requiring the
financial expert to have the first and fifth attributes in our
proposed definition, but only two of the other three
attributes.
Many commenters criticized specific provisions of the proposed
financial expert definition as being too narrow. In particular,
many commenters asserted that our proposed requirement that an
expert have direct experience preparing or auditing financial
statements was greatly, and needlessly, restrictive. Other
commenters were concerned that the requirement that a person have
had experience with financial statements presenting issues
generally comparable to those raised by the company's financial
statements might have anti-competitive effects if we interpreted
this requirement to mean that a financial expert would need
previous experience with financial statements of other companies in
the same industry.
Several commenters sought clarification regarding the relevant body
of generally accepted accounting principles, in particular for
financial experts of foreign private issuers. Other commenters
expressed concern over the possible lack of potential financial
experts that would be knowledgeable about accounting for estimates
and reserves in specific industries, such as the insurance and oil
industries.
Numerous additional commenters were concerned that the proposed
definition was too restrictive regarding the means by which a
person could acquire the required expertise to qualify as a
financial expert. They suggested that a requirement that an expert
have experience as a public accountant, auditor, principal
financial officer, controller, principal accounting officer or in a
similar position, would severely limit the number of persons
qualified to be financial experts. Some believed that there are a
substantial number of highly qualified persons who have sufficient
knowledge and experience to effectively and competently perform the
activities required of a financial expert, but do not have
experience in one of the listed positions. They questioned the
relevance of the means by which a person acquires the necessary
expertise, so long as the person in fact has such
expertise.
c. Final Definition of "Audit Committee Financial
Expert"
The final rules define an audit committee financial expert as a
person who has the following attributes:
●
An
understanding of generally accepted accounting principles and
financial statements;
●
The
ability to assess the general application of such principles in
connection with the accounting for estimates, accruals and
reserves;
●
Experience
preparing, auditing, analyzing or evaluating financial statements
that present a breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of
issues that can reasonably be expected to be raised by the
registrant's financial statements, or experience actively
supervising one or more persons engaged in such
activities;
●
An
understanding of internal controls and procedures for financial
reporting; and
●
An
understanding of audit committee functions.
Under the final rules, a person must have acquired such attributes
through any one or more of the following:
(1)
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Education and experience as a principal financial officer,
principal accounting officer, controller, public accountant or
auditor or experience in one or more positions that involve the
performance of similar functions;
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(2)
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Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant,
auditor or person performing similar functions;
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(3)
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Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing or
evaluation of financial statements; or
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(4)
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Other relevant experience.
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d. Discussion of Significant Modifications to the Proposed
Definition of "Financial Expert"
We have made several changes to our proposed definition of a
financial expert. As already discussed, we have decided to use the
term audit committee financial expert rather than financial expert
in the final rules. We also have reorganized the components of the
definition to make it easier to read and to emphasize, by including
them in the first part of the definition, the attributes that an
audit committee financial expert must possess. The second part of
the definition discusses the means by which a person must acquire
the necessary attributes. We also have eliminated the proposed
instruction listing several factors that a company's board of
directors should consider in evaluating the education and
experience of an audit committee financial expert
candidate.
Proposed
attributes of a financial expert.
i. The financial expert must have
an understanding of generally accepted accounting principles and
financial statements.
We are adopting this attribute substantially as proposed. However,
in response to comments, we have added an instruction to clarify
that, with respect to foreign private issuers, the audit committee
financial expert's understanding must be of the generally accepted
accounting principles used by the foreign private issuer in
preparing its primary financial statements filed with the
Commission. Our
rules require foreign private issuers that do not prepare their
primary financial statements in accordance with U.S. generally
accepted accounting principles to include a reconciliation to those
principles in the financial statements that they file with the
Commission. Although an understanding of reconciliation to U.S.
generally accepted accounting principles would be helpful, we
believe that the proper focus of audit committee financial
expertise is on the principles used to prepare the primary
financial statement. We also are sensitive to the fact that
requiring an audit committee financial expert to possess expertise
relating to U.S. generally accepted accounting principles could
burden foreign private issuers who use home country accounting
principles or international accounting standards to prepare their
primary financial statements.
ii. The financial expert must have
experience applying such generally accepted accounting principles
in connection with the accounting for estimates, accruals and
reserves that are generally comparable to the estimates, accruals
and reserves, if any, used in the registrant's financial
statements.
Several commenters were concerned that potential audit committee
financial experts would not have experience with the unique and
complex accounting for estimates, accruals and reserves in certain
industries, such as the insurance industry, unless they have had
direct previous experience in these industries. The commenters
further noted that there could be a very limited pool of audit
committee financial expert candidates available with such
experience that would not have ties to a competitor within the same
industry. In light of these comments, we have revised this
attribute by eliminating the clause "that are generally comparable
to the estimates, accruals and reserves, if any, used in the
registrant's financial statements." We also have revised this
attribute to state that the audit committee financial expert must
have the ability to assess the general application of generally
accepted accounting principles in connection with the accounting
for estimates, accruals and reserves, rather than stating that the
expert must have experience applying these principles.
We believe that this description of
the attribute better satisfies the intent of the statute and better
reflects the role to be played by audit committees. We recognize
that the pool of persons possessing the highly specialized
technical knowledge that some thought the proposals necessitated
may be so small that a substantial percentage of companies in
certain industries would be compelled to disclose that they could
not retain an expert without recruiting a person associated with a
competitor. We do not intend for the new requirements to lead to
such a result. An audit committee financial expert must be able to
assess the general application of generally accepted accounting
principles in connection with accounting for estimates, accruals
and reserves. This general attribute provides the necessary
background for an audit committee when addressing more detailed
industry-specific standards or other particular topics. Experience
with such detailed standards or topics is not a necessary attribute
of audit committee financial expertise.
iii. The financial expert must have
experience preparing or auditing financial statements that present
accounting issues that are generally comparable to those raised by
the registrant's financial statements.
The majority of commenters who thought that the proposed definition
of "financial expert" was too restrictive focused on this
attribute. We are convinced by the weight of the comments that the
proposed requirement that an expert have direct experience
preparing or auditing financial statements could impose an undue
burden on some companies, especially small companies, that desire
to have an audit committee financial expert. We also are persuaded
by commenters' arguments that persons who have experience
performing in-depth analysis and evaluation of financial statements
should not be precluded from being able to qualify as audit
committee financial experts if they possess the other four
necessary attributes of an expert. We therefore have broadened this
attribute by requiring an audit committee financial expert to have
experience "preparing, auditing, analyzing or evaluating" financial
statements.
We believe that our revisions properly capture the clear intent of
the statute that an audit committee financial expert must have
experience actually working directly and closely with financial
statements in a way that provides familiarity with the contents of
financial statements and the processes behind them. We also believe
that our revisions appropriately broaden the group of persons who
are eligible to be audit committee financial experts. We recognize
that many people actively engaged in industries such as investment
banking and venture capital investment have had significant direct
and close exposure to, and experience with, financial statements
and related processes. Similarly, professional financial analysts
closely scrutinize financial statements on a regular basis. Indeed,
all of these types of individuals often hold positions that require
them to inspect financial statements with a healthy dose of
skepticism. They therefore would be well prepared to diligently and
zealously question management and the company's auditor about the
company's financial statements. Effective audit committee members
must have both the ability and the determination to ask the right
questions. Therefore, we have broadened this attribute to include
persons with experience performing extensive financial statement
analysis or evaluation.
We also are convinced by commenters that a potential audit
committee financial expert should be considered to possess this
attribute by virtue of his or her experience actively supervising a
person who prepares, audits, analyzes or evaluates financial
statements. The term "active supervision" means more than the mere
existence of a traditional hierarchical reporting relationship
between supervisor and those being supervised. Rather, we mean that
a person engaged in active supervision participates in, and
contributes to, the process of addressing, albeit at a supervisory
level, the same general types of issues regarding preparation,
auditing, analysis or evaluation of financial statements as those
addressed by the person or persons being supervised. We also mean
that the supervisor should have experience that has contributed to
the general expertise necessary to prepare, audit, analyze or
evaluate financial statements that is at least comparable to the
general expertise of those being supervised. A principle executive
officer should not be presumed to qualify. A principal executive
officer with considerable operations involvement, but little
financial or accounting involvement, likely would not be exercising
the necessary active supervision. Active participation in, and
contribution to, the process, albeit at a supervisory level, of
addressing financial and accounting issues that demonstrates a
general expertise in the area would be necessary.
Finally, we are retaining, with clarification, the requirement that
an audit committee financial expert have experience with financial
statements that present accounting issues that are "generally
comparable" to those raised by the registrant's financial
statements. We do not intend for this phrase to imply that a person
must have previous experience in the same industry as the company
that is evaluating the person as a potential audit committee
financial expert, or that the person's experience must have been
with a company subject to the Exchange Act reporting requirements.
We therefore have modified the requirement to focus on the breadth
and level of complexity of the accounting issues with which the
person has had experience. We think that a company's board of
directors will make the necessary assessment based on particular
facts and circumstances. In making its assessment, the board should
focus on a variety of factors such as the size of the company with
which the person has experience, the scope of that company's
operations and the complexity of its financial statements and
accounting. We do not believe that familiarity with particular
financial reporting or accounting issues, or any other narrow area
of experience should be dispositive.
iv. A financial expert must have
experience with internal controls and procedures for financial
reporting.
We are substituting the term "understanding" for the term
"experience." In our view, it
is necessary that the audit committee financial expert understand
the purpose, and be able to evaluate the effectiveness, of a
company's internal controls and procedures for financial reporting.
It is important that the audit committee financial expert
understand why the internal controls and procedures for financial
reporting exist, how they were developed, and how they operate.
Previous experience establishing or evaluating a company's internal
controls and procedures for financial reporting can, of course,
contribute to a person's understanding of these matters, but the
attribute as rephrased properly focuses on the understanding rather
than the experience.
v. A financial expert must have
an understanding of audit committee functions.
We are adopting this attribute as proposed.
Means
of obtaining expertise.
We have revised the audit committee financial expert definition to
state that a person must have acquired the five necessary
attributes through any one or more of the following:
(1)
|
Education and experience as a principal financial officer,
principal accounting officer, controller, public accountant or
auditor or experience in one or more positions that involve the
performance of similar functions;
|
(2)
|
Experience actively supervising a principal financial officer,
principal accounting officer, controller, public accountant,
auditor or person performing similar functions;
|
(3)
|
Experience overseeing or assessing the performance of companies or
public accountants with respect to the preparation, auditing or
evaluation of financial statements; or
|
(4)
|
Other relevant experience.
|
In response to commenters' remarks, we have eliminated the proposed
requirement that an audit In response to commenters' remarks, we
have eliminated the proposed requirement that an audit committee
financial expert must have gained the relevant experience with a
company that, at the time the person held such position, was
required to file reports pursuant to Section 13(a) or 15(d) of the
Exchange Act. Many private companies are contractually required to
prepare audited financial statements that comply with generally
accepted accounting principles. In addition, a potential expert may
have gained relevant experience at a foreign company that is
publicly traded in its home market but that is not registered under
the Exchange Act.
We have added a provision in response to comments that experience
overseeing or assessing the performance of companies or public
accountants with respect to the preparation, auditing or evaluation
of financial statements can provide a person with in-depth
knowledge and experience of accounting and financial issues. For
example, certain individuals serving in governmental,
self-regulatory and private-sector bodies overseeing the banking,
insurance and securities industries work on issues related to
financial statements on a regular basis. We believe that such
experience can constitute a very useful background for an audit
committee financial expert.
In addition, we have revised the last provision of this part of the
proposed definition. The original proposal stated that a person who
had not served in one of the specified positions alternatively
could have acquired the relevant attributes and experience in a
position that results, in the judgment of the board of directors,
in the person's having similar expertise and experience. The final
rules state simply that a person may acquire the necessary
attributes of an audit committee financial expert through other
relevant experience, and no longer require the company to disclose
the basis for the board's determination that a person has "similar
expertise and experience." We also have eliminated the reference to
the judgment of the board with respect to this provision because,
as explicitly stated in the audit committee financial expert
disclosure requirement, the board must make all determinations as
to whether a person qualifies as an expert. Therefore, this
reference is redundant.
This revision permitting a person to have "other relevant
experience" recognizes that an audit committee financial expert can
acquire the requisite attributes of an expert in many different
ways. We do believe that this expertise should be the product of
experience and not, for example, merely education. Under the final
rules, if a person qualifies as an expert by virtue of
possessing "other relevant experience," the company's
disclosure must briefly list that person's experience.
Proposed
factors to be considered in evaluating the education and experience
of a financial expert.
The proposed definition of "financial expert" included a
non-exclusive list of qualitative factors for a company's board to
consider in assessing audit committee financial expert candidates.
These factors focused on the breadth and level of a potential audit
committee financial expert's experience, understanding and
involvement in relevant activities, including the person's length
of experience in relevant positions, and the types of duties held
by such person in those positions. We believe that the board should
consider all the available facts and circumstances, including but
certainly not limited to, qualitative factors of the type that we
had identified, in its determination. Some commenters were
concerned that some boards would use the list as a mechanical
checklist rather than as guidance to be used in considering a
person's knowledge and experience as a whole. In light of these
comments, the definition does not include this list.
The fact that a person previously has served on an audit committee
does not, by itself, justify the board of directors in
"grandfathering" that person as an audit committee financial expert
under the definition. Similarly, the fact that a person has
experience as a public accountant or auditor, or a principal
financial officer, controller or principal accounting officer or
experience in a similar position does not, by itself, justify the
board of directors in deeming the person to be an audit committee
financial expert. In addition to determining that a person
possesses an appropriate degree of knowledge and experience, the
board must ensure that it names an audit committee financial expert
who embodies the highest standards of personal and professional
integrity. In this regard, a board should consider any disciplinary
actions to which a potential expert is, or has been, subject in
determining whether that person would be a suitable audit committee
financial expert.
Requirement
that an audit committee financial expert possess all five required
attributes.
We are not convinced by comments stating that an audit committee
financial expert should not have to possess all of the attributes
included in our definition. Although Congress did not explicitly
require us to incorporate all of the attributes listed in Section
407 of the Sarbanes-Oxley Act, it also did not limit us to
consideration of those attributes. Congress obviously considered
each of the listed attributes to be important. A definition of
"audit committee financial expert" that leaves the meaning of the
term entirely to the judgment of the board of directors would be
highly subjective and could constitute an abrogation of our
responsibilities under Section 407.
The Sarbanes-Oxley Act clearly was intended to enhance corporate
responsibility by effecting significant change; its purpose was not
to perpetuate the status quo. Therefore, while many companies
likely will be able to determine that they already have an audit
committee financial expert serving on their audit committees, we
believe that the fact that some companies will not be able to draw
this conclusion unless they are able to attract a new director with
the requisite qualifications is consistent with the
Act.
Moreover, the Sarbanes-Oxley Act did not contemplate that a company
could disclose that it has an audit committee financial expert by
virtue of the fact that the audit committee members collectively
possess all of the attributes of an expert; the statute directs us
to issue rules to require a company to disclose whether or its
audit committee is comprised of "at least one member" who is a
financial expert. Due to the statute's use of this specific
language, there is no doubt that Congress had in mind individual
experts and did not contemplate a "collective" expert. We note,
however, that it would be appropriate under the final rules for a
company disclosing that it does not have an audit committee
financial expert to explain the aspects of the definition that
various members of the committee satisfy.
5. Safe
Harbor from Liability for Audit Committee Financial
Experts
Several commenters urged us to clarify that the designation or
identification of an audit committee financial expert will not
increase or decrease his or her duties, obligations or potential
liability as an audit committee member. A few recommended a formal
safe harbor from liability for audit committee financial experts.
Unlike the provisions of the Act that impose substantive
requirements, the requirements
contemplated by Section 407 are entirely disclosure-based. We find
no support in the Sarbanes-Oxley Act or in related legislative
history that Congress intended to change the duties, obligations or
liability of any audit committee member, including the audit
committee financial expert, through this
provision.
In the proposing release, we stated that we did not believe that
the mere designation of the audit committee financial expert would
impose a higher degree of individual responsibility or obligation
on that person. Nor did we intend for the designation to decrease
the duties and obligations of other audit committee members or the
board of directors.
We continue to believe that it would adversely affect the operation
of the audit committee and its vital role in our financial
reporting and public disclosure system, and systems of corporate
governance more generally, if courts were to conclude that the
designation and public identification of an audit committee
financial expert affected such person's duties, obligations or
liability as an audit committee member or board member. We find
that it would be adverse to the interests of investors and to the
operation of markets and therefore would not be in the public
interest, if the designation and identification affected the
duties, obligations or liabilities to which any member of the
company's audit committee or board is subject. To codify this
position, we are including a safe harbor in the new audit committee
disclosure item to clarify that:
●
A person who is determined to be an audit
committee financial expert will not be deemed an "expert" for any
purpose, including without limitation for purposes of Section 11 of
the Securities Act, as a result
of being designated or identified as an audit committee financial
expert pursuant to the new disclosure item;
●
The
designation or identification of a person as an audit committee
financial expert pursuant to the new disclosure item does not
impose on such person any duties, obligations or liability that are
greater than the duties, obligations and liability imposed on such
person as a member of the audit committee and board of directors in
the absence of such designation or identification; and
●
The
designation or identification of a person as an audit committee
financial expert pursuant to the new disclosure item does not
affect the duties, obligations or liability of any other member of
the audit committee or board of directors.
This safe harbor clarifies that any information in a registration
statement reviewed by the audit committee financial expert is not
"expertised" unless such person is acting in the capacity of some
other type of traditionally recognized expert. Similarly, because
the audit committee financial expert is not an expert for purposes
of Section 11, he or she is not
subject to a higher level of due diligence with respect to any
portion of the registration statement as a result of his or her
designation or identification as an audit committee financial
expert.
In adopting this safe harbor, we wish to emphasize that all
directors bear significant responsibility. State law generally
imposes a fiduciary duty upon directors to protect the interests of
a company's shareholders. This duty requires a director to inform
himself or herself of relevant facts and to use a "critical eye" in
assessing information prior to acting on a
matter.38
Our new rule provides that whether a
person is, or is not, an audit committee financial expert does not
alter his or her duties, obligations or liabilities. We believe
this should be the case under federal and state law. 6.
Determination of a Person's Status as an Audit Committee Financial
Expert
The Sarbanes-Oxley Act does not explicitly state who at the company
should determine whether a person qualifies as an audit committee
financial expert. We believe that the board of directors in its
entirety, as the most broad-based body within the company, is
best-equipped to make the determination. We think that it is
appropriate that any such determination will be subject to relevant
state law principles such as the business judgment
rule.
7.
Location of Audit Committee Financial Expert
Disclosure
The Sarbanes-Oxley Act expressly states that companies must include
the financial expert disclosure in their periodic reports required
pursuant to Section 13(a) or 15(d) of the Exchange Act. The final
rules that we are adopting require companies to include the new
disclosure in their annual reports on Forms 10-K, 10-KSB, 20-F or
40-F. The requirement to provide the new audit committee disclosure
item is included in Part III of Forms 10-K and 10-KSB, enabling a
domestic company that voluntarily chooses to include this
disclosure in its proxy or information statement to incorporate
this information by reference into its Form 10-K or 10-KSB if it
files the proxy or information statement with the Commission no
later than 120 days after the end of the fiscal year covered by the
Form 10-K or 10-KSB.
Although some commenters recommended that we require companies to
include the audit committee financial expert disclosure in their
proxy and information statements, registration statements and
quarterly reports, as well as in their annual reports, we are not
convinced that the benefits to investors would exceed the costs to
companies of requiring this disclosure in additional documents or
on a more frequent basis.
8.
Change in Item Number
We proposed to designate the audit committee financial expert
disclosure requirement as new Item 309 of Regulations S-K and
S-B. However, existing Item 401
seems to be a more logical location for this requirement. Item 401
currently requires, among other things, a brief description of the
business experience of each director. Therefore, we are designating
the new disclosure item as Item 401(h) of Regulation S-K and Item
401(e) of Regulation S-B. The new item specifies that a company may
choose to include the audit committee financial expert disclosure
in its proxy or information statement if the company incorporates
such information into its annual report as permitted by the
instructions to Forms 10-K and 10-KSB.
B. Code of Ethics
1. Code
of Ethics Disclosure Requirements
a. Proposed Disclosure Requirements
Section 406 of the Sarbanes-Oxley Act directs us to issue rules
requiring a company that is subject to the reporting requirements
of Section 13(a) or 15(d) of the Exchange Act to disclose whether
or not the company has adopted a code of ethics for its senior
financial officers that applies to the company's principal
financial officer and controller or principal accounting officer,
or persons performing similar functions. The Act further directs us
to require companies that have not adopted such a code of ethics to
explain why they have not done so. In addition to requiring the
disclosure mandated by Section 406, we proposed rules to require
disclosure as to whether the company has a code of ethics that
applies to its principal executive officer.
b. Commenters' Remarks
Some of the commenters thought that the required disclosure should
be limited to a statement indicating whether the company has a code
of ethics that applies to its senior financial officers, and if
not, why not. Others stated that it was appropriate to expand the
requirements of the Sarbanes-Oxley Act to also require a company to
disclose whether it has a code of ethics that applies to its
principal executive officer. A few commenters thought that we
should extend the requirement even further to require a company to
state whether it has a code of ethics that applies to other
individuals, such as directors, all executive officers, and the
company's employees generally.
After considering the comments, we continue to think that it is
appropriate and consistent with the purposes of the Sarbanes-Oxley
Act to extend the scope of our rules under Section 406 to include a
company's principal executive officer, as proposed. It seems
reasonable to expect that a company would hold its chief executive
officer, an official superior to the company's senior financial
officers, to at least the same standards of ethical conduct to
which it holds its senior financial officers. Some commenters who
are investors confirmed that they not only have an interest in
knowing whether a company holds its senior financial officers to
certain ethical standards, but whether the company holds its
principal executive officer to ethical standards as
well.
c. Final Disclosure Requirements
The final rules require a company to disclose whether it has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions. If the company has not adopted such a code of ethics, it
must explain why it has not done so.