Governance

Missing: Audit Committee Accountants

A new study finds that while a majority of companies reported having at least one audit committee member with financial expertise, just 23 percent ...
Stephen TaubNovember 28, 2006

Accountants are steadily infiltrating audit committees. However, the majority of companies polled did not have an accountant on their audit committee as recently as 2005. These are among the most significant findings of a new study that surveyed 700 audit committee members at 178 public companies from the NASDAQ 100 and Fortune 100 listings, conducted by Huron Consulting Group.

The study found that the number of audit committee members who were accountants doubled from 5 percent in 2002 to 11 percent in 2005. Further, the results said that the number of audit committees with at least one accountant increased from 20 percent in 2002 to 38 percent in 2005.

However, 111 companies—or a majority of the 178 sampled—did not have an accountant on their audit committee in 2005, according to Huron. Indeed, the research concluded that while all companies reported having an audit committee member with financial expertise in 2005, just 23 percent of the designated financial experts had biographies indicating they had accounting backgrounds.

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“Despite an increase in the number of accountants on audit committees, they are still playing catch up to other categories of professionals,” said Maureen Loftus, managing director, Huron Consulting Group, in a statement. “In fact, most people are very surprised to learn how few accountants are on audit committees.”

To be sure, audit committee members who are finance professionals exceeded accountants by 3 to 1 in 2005, down from 5 to 1 in 2002, according to the study. What’s more, Huron found that while the number of audit committee members considered to be accountants or finance professionals increased from 33 percent in 2002 to nearly 44 percent in 2005, audit committee members in the “other” category represented more than half of all audit committee members.

The consultants point out that the idea of having a financial expert on the audit committee became more critical in January 2003, when the Securities and Exchange Commission issued a rule requiring issuers to disclose “audit committee financial expert” information in annual reports filed for fiscal years ending on or after July 15, 2003.

According to the SEC, audit committee financial experts should have 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 at least have experience actively supervising persons engaged in such activities; an understanding of internal controls and procedures for financial reporting, and an understanding of the audit committee function.

In addition, both the New York Stock Exchange and NASDAQ established new listing requirements for member companies. They don’t explicitly require audit committees to have a “financial expert,” but they do require each audit committee to have at least one member with experience in accounting or finance to analyze how organizations are adapting to the rules and recommendations.

Other findings from the study include:

• From 2002 to 2005, the average annual number of audit committee meetings nearly doubled from about five to 10 during the period.

• The percentage of audit committee members who were employed full-time remained relatively constant, at about 62 percent to 63 percent from 2002 to 2005.

• The average number of audit committee members has remained constant, at about four per company from 2002 to 2005.

• The average age of audit committee members—60 years old—remained steady for each year.