Securities and Exchange Commission

The SEC and You: What Do Financial Experts Need to Know?

Back in 2002, the Securities and Exchange Commission (SEC) implemented the Sarbanes-Oxley Act. This significant Act included specific Sections defining how public companies controlled against risk of fraud.  In this post, you will learn about the history and evolution of the Sarbanes-Oxley Act and how the SEC currently defines a “financial expert.” This will help ensure your company is in compliance with current SEC regulations as regards finance experts who serve on your audit committee.

“Financial Expert” Defined

When the SEC first released its definition of “financial expert,” it stated such a person must have expertise in preparing/auditing finance statements. Later, under pressure from companies displeased with such a restrictive definition, the SEC revised its definition to state that such a person must have financial expertise to a level required to prepare and/or audit the finance statements generated by the being served.

What this means for your company

When you select the members of your audit committee, those designated as financial experts must be able to demonstrate sufficient financial skills to prepare and audit your own company’s financial statements.

Three SEC Requirements

The Sarbanes-Oxley Act of 2002 included three Sections (404, 406 and 407) designed specifically to guide companies to take a proactive approach to controlling fraud.

Here are the 3 Sections’ requirements:

– Appoint individuals to serve on the audit committee who meet the SEC criteria for a “financial expert” AND disclose the identities of those individuals.
– Adopt a code of ethics to govern the actions of the company’s chief executive and senior finance officers.
– Include in each annual report a copy of the company’s internal control report.

What this means for your company

Here, the important action item is to adopt a code of ethics and make it publicly accessible, updating it whenever changes or edits are approved.

A Word about the Internal Report (Annual Report)

Despite frequent updates, the SEC has yet to define precisely what information must be included in the internal report that must be attached to a company’s annual report. In lieu of a quantifiable set of requirements, the SEC takes what it calls an “interpretive approach” to evaluating how well a company controls for accuracy in financial reporting.

To date, these are the elements that must in some form be present in a company’s internal report:

– A management statement of responsibility for maintaining accurate internal accounting.
– A management statement assessing the effectiveness of its own internal control over financial reporting.
– A management statement outlining how the internal control report was conducted and how conclusions were established.
– A management statement attesting that the public accountant retained to audit the company’s financial statements has validated management’s own assessment of its own internal financial reporting controls.

As well, the internal report itself must include certain key documents:

– Policies dictating disclosure of use of company assets.
– Policies dictating that all such use is recorded for use in financial statements as per GAAP (generally accepted accounting principles) standards.
– Assurance that policies are in place to detect unauthorized use of company assets.
– Appropriate financial documentation and record-keeping to support all of the above.

What this means for your company

The internal report is the most complex part of compliance with the Sarbanes-Oxley Act, as there is a continual balancing act between maintaining adequate internal financial controls and disclosing such controls in the annual report. Luckily, the SEC’s own reliance on “interpretive guidance” gives you some leeway to make your own case for compliance as needed.

Jonah Engler is a financial expert from NYC.


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Jonah Engler

Former Stock Broker and Financial Expert, Jonah Engler is a New York City based entrepreneur who writes about entrepreneurship, investing, public relations, and other topics that fascinate him. Engler explores Entrepreneurship through his Mobile Phone Franchises in the NYC area.