Composition of the audit committee: Ensuring members meet the new independence and financial literacy rules

Abstract

Responding to the corporate scandals that have recently dominated the front pages of US newspapers, the Sarbanes–Oxley Act, the Securities and Exchange Commission (SEC) and the major US securities markets have imposed a number of sweeping corporate governance changes on public companies (including non-US public companies — so-called ‘foreign private issuers’) traded in the USA. Of special significance, the US federal securities laws and the major national securities markets now mandate that public companies possess audit committees composed of ‘independent’ members who meet exacting and specific criteria. Unfortunately, unlayering the various new and different corporate governance rules can be a complex and daunting task. In an effort to assist companies, including foreign private issuers, to understand and comply with these new rules — which are currently in effect for US companies and which will take effect no later than 31st July, 2005 for foreign private issuers — this paper provides a brief overview of key new requirements imposed by the Sarbanes–Oxley Act, and the SEC regulations promulgated thereunder, by the New York Stock Exchange (NYSE), and by the NASDAQ, including certain exceptions for foreign private issuers.