| Independent directors must make up the majority of the board of directors of a company listed on the New York Stock Exchange. In addition, listed companies must have several committees made up entirely of independent directors, including the Audit Committee.
New York Stock Exchange Rule 303A.07 provides that each company listed on the Exchange must have an Audit Committee made up of at least three independent directors. The board of directors sets criteria within Exchange guidelines for determining whether its directors are independent by having no material relationship with the company other than the seat on the board of directors.
A director serving on the Audit Committee must be "financially literate" in addition to being independent, or the director must become financially literate reasonably soon after appointment to the Audit Committee. Determination of financial literacy is made by the board of directors of the listed company.
Also, one or more members of the Audit Committee must be considered by the board to have accounting or financial management expertise. A member of the Audit Committee may not serve on the Audit Committees of more than three public companies unless the board of the listed company publicly determines that service on more than three Audit Committees will not reduce the effectiveness of the member of the listed company's audit committee.
Each of the committees of independent directors of companies listed on the New York Stock Exchange must have written charters. The written charter for the Audit Committee must include information regarding the committee's functions. Those functions include providing guidance to the full board of directors regarding:
- Legal and regulatory financial statement requirements;
- Independent auditor qualifications; and
- Internal audit and independent audit results.
The Audit Committee's written charter also should describe the Committee's annual self-evaluation of its performance, duties of the Committee, the Committee's annual review of independent auditor reports on the listed company's internal financial control procedures, and the Committee's review of financial statements, earnings press releases, and issues raised by the company's independent auditor.
The duties of the Audit Committee to be described in its charter include:
- Assumption of direct responsibility for dealing with the company's independent auditor;
- Setting up a procedure for receipt of complaints or concerns from within the company regarding accounting or auditing matters; and
- Maintaining sufficient funding and ability to engage outside advisers to deal with accounting or auditing issues.
Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |