What Is an Audit Committee Financial Expert and Why Is It Important

An audit committee financial expert is a member of the audit committee who has expertise in financial matters. They are required by law to be a member of the audit committee of a publicly traded company.

Their role is crucial in ensuring the financial statements are accurate and comply with accounting standards. The Sarbanes-Oxley Act of 2002 requires companies to have an audit committee financial expert to provide an independent perspective on financial matters.

The financial expert must be able to understand complex financial issues and provide guidance to the audit committee.

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Having a financial expert on the audit committee is crucial for public companies, with the SEC requiring them to have one.

Private companies aren't required to have a financial expert, but 80% of them do, showing the importance of having an expert in this role.

The audit committee financial expert is responsible for overseeing the work of the registered public accounting firm and internal financial reports.

Private companies planning to go public will need a financial expert before their initial public offering, which can be a game-changer.

Companies with a good financial expert will be better equipped to handle new accounting rules and regulations that may come up.

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Having a financial expert on your audit committee is crucial for private companies, as 80% of them already do. This is because they're directly responsible for appointing and overseeing the work of accounting firms and reviewing internal financial reports.

Public companies are required to have a financial expert on their audit committees, and it's preferred that this person is an independent board director.

Private companies that plan to go public will need a financial expert in place before their initial public offering.

Companies with a financial expert on board are better equipped to handle new accounting rules and regulations that may be introduced.

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The Exchange Act requires specific disclosures about the audit committee financial expert. Boards must disclose in their annual reports whether they have at least one audit committee financial expert.

Boards must disclose the expert's name and whether they're independent or part of management. If a corporation doesn't have an audit committee financial expert, they must disclose the reason in their annual report.

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Experts who claim to qualify as an audit committee financial expert by reason of having other relevant experience must show a brief summary of their experience. Boards that disclose only having collective financial experience don't qualify as having an audit committee financial expert under the regulations.

Section 11 of the Securities Act clarifies the reach of liability that applies to audit committee financial experts. It contains a safe harbor provision that protects audit committee financial experts from certain liability concerns.

Audit committee financial experts aren't responsible for any duties, obligations or liabilities that are any greater than those of any other member of the audit committee.

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To qualify as a financial expert, you must have a deep understanding of GAAP and financial statements. This is a fundamental requirement.

The SEC has defined the qualifications for an audit committee financial expert, and it's not just about holding a specific title. You can gain experience in various roles, such as a public accountant or auditor.

Experience in preparing, auditing, analyzing, or evaluating financial statements that present complex accounting issues is also essential. This can be gained through actively supervising others or performing similar functions.

A financial expert must also be able to understand internal controls and procedures for financial reporting and audit committee functions. This requires a broad range of knowledge and skills.

To meet the requirements, you can hold one of the following positions: principal financial officer, principal accounting officer, controller, public accountant, or auditor. Alternatively, you can have experience in similar positions or supervising others in these roles.

Here are the key qualifications:

An audit committee can use a self-assessment tool like a questionnaire based on leading practices to evaluate their performance.

The Audit Committee Guide offers practical considerations and resources to help committee members fulfill their responsibilities.

Committee members can ask questions related to specific requirements, responsibilities, and effectiveness, which are included in a downloadable PDF.

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The Audit Committee Financial Expert is a crucial member of the audit committee.

The definition of an Audit Committee Financial Expert varies, but it is typically someone who meets the attributes outlined in Form N-CSR and is designated by the audit committee.

In the United States, the Securities and Exchange Commission (SEC) defines an Audit Committee Financial Expert as someone who meets certain independence requirements and is considered financially literate.

The Board of Trustees must determine whether a member meets the requirements of the definition of "audit committee financial expert" set forth in the applicable rules of the SEC.

Here are some examples of how an Audit Committee Financial Expert is referred to in a sentence:

A self-assessment tool can be a huge help in evaluating your performance as an audit committee member. A questionnaire based on leading practices is a great option to consider.

The Audit Committee Guide offers practical considerations and resources to support you in fulfilling your responsibilities. This guide is a valuable resource for both new and experienced committee members.

You can download a PDF with questions for audit committees to consider, making it easy to review and reflect on your performance.

An audit committee charter is a crucial document that outlines the committee's responsibilities and duties. It's a written charter that must be adopted by the board and disclosed in the company's proxy statement.

The SEC, NYSE, and Nasdaq set minimum requirements for the content of the audit committee charter. The NYSE requires the audit committee charter to include oversight of several key areas.

The audit committee charter should be reviewed at least annually, as required by Nasdaq standards. This review is also recommended for all audit committees.

The charter should set forth the audit committee's recurring responsibilities as well as its responsibility for overseeing areas outside of those required by the SEC and listing standards of the exchange on which the company's securities are listed.

To help with planning, audit committees can consider using their charter to create a calendar outlining what might be covered during each meeting over the course of a year.

An annual review of the charter may be necessary due to changes in regulatory or legal requirements, delegation of new responsibilities, or changes in the company's bylaws.

The charter should allow the committee to meet outside the official calendar when needed. The committee can examine its meeting schedule and consider if modifications are needed to allow the audit committee sufficient time to effectively carry out all its responsibilities.

Audit committees can consult with legal counsel, management, the internal auditors, if any, and the independent auditor when updating the charter and calendar. Any recommended changes to the audit committee charter should be presented to the board for approval.

Here are some factors that may render updates necessary:

Many public companies might benefit from an ACFE with hands-on experience in preparing or auditing financial statements.

The specialized nature of companies operating in the insurance, energy, or banking industries likely requires an ACFE with firsthand industry experience with complex technical accounting issues.

A working knowledge of recent accounting standards related to revenue recognition, fair value measurement, and derivatives and hedging requires much more than only a general understanding.

Dennis Beresford, a former FASB chairman, believes that the criteria for qualifying as an ACFE do not provide for sufficient understanding of accounting and auditing matters.

Beresford is particularly concerned that the rules allow former CEOs and others who have supervised finance functions but have not actually performed them to qualify as ACFEs.

Some ACFEs may be outstanding audit committee members, but others may not understand the nuances of accounting and auditing matters, internal controls, and SEC regulations to be fully effective.

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