The NYSE recently proposed to alter its corporate governance listing standards regarding audit committee meetings by clarifying that “the audit committee must meet to review and discuss the company’s financial statements and must review the company’s specific Management’s Discussion and Analysis disclosures.”
The original rule only required that audit committees “discuss” the issues.
The insertion of the phrase “meet to review” has raised a number of key questions regarding board practices; namely, will audit committees have to “meet” in person, and more often, to review the required disclosures?
Current Practices
Experts note that audit committees have already been meeting more frequently in recent years, and that meetings have been running longer to ensure agendas are not rushed.
Not long ago, most audit committees met five times during the year; although the SEC doesn’t regulate frequency, most committees would meet three times prior to the filing of company’s quarterly reports, and twice before the annual report.
But now, the groups are getting together much more often.
A board compensation study released last week by Mellon Financial noted that, on average, audit committees are meeting eight times a year, "double the number from two years ago" (see box at right).
Graziano
“Audit committees are meeting more frequently—both informally and formally,” wrote Financial Executives Research Foundation director of research Cheryl de Mesa Graziano in a report published earlier this year. Her study, based on a series of audit committee member interviews, concluded that workload and time commitment for committee members are on the rise.
According to Graziano, “Formal meetings occur at least four, and sometime up to 12, times per year.” Typically, she notes, four of those meetings are in person. The rest usually occur by telephone to review quarterly results. For public companies, notes Graziano, “this would mean related financial statement filings and earnings press releases, including external auditor review and CEO/CFO certification.”
The increase in the number of meetings is partially due to the fact that financial disclosures requiring audit committee approval aren’t always timed with board meetings. “Most companies hold audit committee meetings around regular board meetings,” says Allan Horwich, a partner at the Chicago-based law firm Schiff Hardin. Unfortunately, according to Horwich, those meetings “don’t necessarily sync up with 10-Q or 10-K filing schedules, or even the MD&A disclosures.”
Required Changes?
So will public companies have to change their practices based on the proposed NYSE rule?
That depends, of course, on current committee practices. Frequency of meetings, for example, will still be up to committees to determine based on their responsibilities and timing of key announcements. That’s because the proposal clarifies that audit committees must meet to review and discuss the company’s financial statements, “and must review the company’s specific Management’s Discussion and Analysis disclosures.” According to some, that hasn’t always been the case. Some committees might, for example, discuss required MD&A disclosures at one meeting, and shortly thereafter get a draft of the MD&A section from management. Committee members might then comment on the draft and discuss it with management, but not necessarily hold a follow-up meeting to—as the NYSE proposal states—“review the company’s specific Management’s Discussion and Analysis disclosures.”
“As to whether audit committees will need to meet more regularly,” says Diana DeSocio at the New York Stock Exchange, “potentially they may, depending on the timing of the company’s regular board meetings.”
And regarding the new wording that companies “must meet to review and discuss the company’s financial statements,” the general consensus is that in-person meetings are not required. Audit committees “can either meet physically or by telephone,” says DeSocio.
Horwich
“I do not think this necessarily requires more physical face-to-face meetings,” agrees Horwich at Schiff Hardin. Indeed, conference calls often suffice for certain committee matters. “It would be possible, and may be common,” notes Horwich, “to hold a conference call to discuss the quarterly earnings press release, for example, but then meet in person to discuss the financial statements” what would be included in periodic reports, as well as the MD&A sections of those documents.
The challenge of telephonic meetings, of course, is that they tend to be less productive and focused than face-to-face meetings. “There could be a tendency to be perfunctory in a conference call,” says Horwich, “whereas if people are gathered in a meeting room—especially if they traveled to get there—they may be more likely to take more time to scrutinize a document.”
As for other potentially critical issues in the NYSE proposal most experts note the changes are not significant. One, for example, would require the companies submit “Annual and Interim Written Affirmations” directly to the exchange. Most experts view that as simply a check-the-box requirement with which companies will need to comply. “The additional certificate … may be just one more compliance issue to add to the ever-increasing list,” notes Horwich.
Some of the other proposed changes are relatively minor tweaking of existing requirement, including reformulated language around “independence,” clarified duties of compensation committees, and other matters. Most are considered non-controversial changes, although Horwich notes that some of the “fine tuning of the independence concepts” may raise some concerns.
The complete NYSE proposal is available for download from the box above, right.
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