Under the adopted regulations, companies listed on US stock markets must have only independent directors serving on the corporate board’s audit committee, according to a news release. To determine audit committee independency, the SEC established two criteria:
- Audit committee members must be barred from accepting any consulting, advisory or compensatory fee from the issuer or any subsidiary, other than in the member’s capacity as a member of the board or any board committee.
- An audit committee member must not be an affiliated person of the issuer or any subsidiary apart from capacity as a member of the board or any board committee.
Once established, the audit committees will be responsible for overseeing outside auditors, which includes determinations related to the hiring, firing and setting fees for the said auditor. Further, the committees will have to establish procedures to hear confidential complaints about the company’s auditing or accounting.
Funding for the audit committee must be provided by the company.
Although the new rule applies to non-US firms whose stock trades in the US, the SEC made modifications to accommodate practices abroad. These modifications were made in part to concerns raised from some Europeans countries that require shareholders, not audit committees, to pick the company’s auditor.
To avoid any potential conflict, the final SEC rule clarifies that US regulators will not object to alternative approaches as long as corporate executives do not hire or oversee the company’s auditors.
The new rules implement the requirements of Section 10A(m)(1) of the Securities Exchange Act of 1934, as added by Section 301 of the Sarbanes-Oxley Act of 2002. C ongress originally ordered the final rules to take effect by April 26, but the SEC gave companies more leeway.
Under the SEC approved version of the regulations,listed issuers will be required to comply with the new listing rules by the date of their first annual shareholders meetings after January 15, 2004, but in any event no later than October 31, 2004. Foreign private issuers and small business issuers will be required to comply by July 31, 2005. Companies not in compliance with the audit committee requirements by the set date will be prohibited from listing any security with the national securities exchanges and national securities associations.