By: Tracy Levine, President, Advantage Talent, Inc.
Most articles about IFRS have been technical in nature. The focus has been on what items will be accounted for differently under IFRS versus GAAP. Little attention has been given to how the switch to IFRS will affect corporate governance. While the SEC supports the switch to IFRS, they have expressed concern that the switch will cause a short term SOX compliance issue as it relates to financial experts on the audit committee. Under SOX at least one member of the Audit Committee must be defined as an Audit Committee Expert. The SEC defines an Audit Committee Financial expert as a person who has the following attributes:
An understanding of generally accepted accounting principles and financial statements;………………..Under the final rules, a person must have acquired such attributes through any one or more of the following:
(1) Education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions;
(2) Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions;
(3) Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or
(4) Other relevant experience.
Under the final rules the SEC makes it clear that just because someone was already serving on an Audit Committee did not mean they could automatically be grandfathered in as the Audit Committee Financial Expert. It further states that the fact that a person has experience as a public accountant or auditor, a principal financial officer, controller or principal accounting officer or experience in a similar position would not, by itself, justify the board of directors in deeming the person to be an Audit Committee Financial expert.
The rules of the game are changing. An understanding of GAAP is no longer going to be the starting benchmark. IFRS knowledge is going to be the starting benchmark. Audit Committee Financial Experts familiar with IFRS are going to be in short supply. Very few financial experts have the prerequisite experience to qualify as the expert under SOX. One of the groups actively preparing for and educating their members about the switch to IFRS is Certified Public Accountants (CPA). Starting in 2011, the CPA Exam will include testing on IFRS. A CPA is required to finish a predetermined amount of Continuing Professional Education (CPE) each year to keep their licenses current. For the last couple of years they have been able to take numerous CPE Classes on IFRS. Putting a CPA with IFRS training on the Audit Committee may be one of the steps companies may have to take to protect themselves from litigation.
Shareholders have become very litigious. Many feel the gatekeepers have failed miserably and left the shareholders with diminished assets. The Security Police and Fire Professionals of America are suing Goldman Sachs and Morgan Stanley over large bonuses and losses sustained by investors. The Atlanta Firefighters’ Pension Fund is suing their custodian, Chicago-based Northern Trust, over risky investments. These are just a few examples of shareholders lashing out. Corporate Boards run the risk of finding themselves the next group of gatekeepers subject to shareholder litigation. If the company loses money or fraud is discovered, shareholders might put forth litigation challenging the competence of the Audit Committee Expert, the Audit Committee members and of corporate decisions approved by audit committees who are alleged to have lacked the necessary competence.
The Securities and Exchange Commission is soliciting comments on this issue and several others related to IFRS and Corporate Governance. If you are interested in commenting on this issue, the SEC requests the following:
DATES: Comments should be received on or before October 18, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
•Use the Commission’s Internet comment form
•Send an e-mail to email@example.com. Please include File Number 4-608 on the
subject line; or
•Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
•Send paper comments in triplicate to
Elizabeth M. Murphy, Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549–1090.
All submissions should refer to File No. 4-608. This file number should be included on the subject line if e-mail is used.
Click the following link to read about all of the Coporate Governance Issues being addressed by the SEC: http://www.sec.gov/rules/other/2010/33-9134.pdf