PricewaterhouseCoopers Center for Innovation in Professional Services

The Role of Expertise Post Sarbanes-Oxley
Oct. 18, 2005

With the passage of Sarbanes-Oxley has come a greater emphasis on expertise as a means to increase the transparency of key corporate activities of publicly traded firms and, therefore, improve the quality of information available to investors. Specifically, Section 407 of Sarbanes-Oxley requires that at least one member of the audit committee be a "financial expert." At a minimum, this expert must have knowledge of internal control procedures and audit committee functions as well as preparing, auditing, analyzing, or evaluating financial statements in accordance with GAAP. Public disclosure of this audit committee financial expert is intended to improve investor confidence through higher quality financial reporting. 

Although the act may provide reassurance to investors, many of its provisions -- including Section 407 -- have been controversial due to cost and time demands as well as potential liability for individuals and corporations. A recent study conducted by Professor Perry examined the specific issue of financial expertise in Section 407 as reported in the proxy statements of almost 500 firms during the first year of the implementation of this requirement. Her findings from this study enhance our understanding of the financial reporting requirement in four significant ways. First, contrary to the expectations of some corporate critics of the requirement, her evidence suggests that the pool of qualified financial experts for public firms is more than adequate. Almost all of the firms in the sample designated a financial expert, and many firms designated multiple experts. Second, some advocates of stricter regulation worried that allowing firms the option to not name a financial expert would result in limited implementation of the financial expert disclosure. Her findings suggest that this concern was greatly overstated as almost all firms identified a financial expert. Apparently firms did not want to risk the possible consequences of being labeled a "non-designator." Third, during the comment period, firms expressed concern that board members designated as financial experts would be subject to increased liability. The findings show that a significant number of firms name multiple financial experts, suggesting that safe harbor provisions may have allayed these fears. Finally, the profile of the financial experts described in her study can help in assessing the effectiveness of the financial reporting requirement. 

Although Professor Perry's findings suggest that many of the initial concerns about designating a financial expert have proved unfounded, further examination is still needed into the responsibilities and the roles that these experts maintain in assuring improved financial reporting. Within this context, "The Role of Expertise Post Sarbanes-Oxley" presentation and panel discussion explored perspectives on financial expertise from the point of view of a regulator, an audit-committee member, and a legal expert. First, Jennifer Rand, Public Company Accounting Oversight Board Associate Chief Auditor, presented her views on "Auditor Expertise Post-SOX."  Next, Ernst & Young Partner Clint Bowes discussed "Changes in the Relationships between Independent Registered Public Accounting Firms, Management, and the Audit Committee." Finally, Michael Dooley, University of Virginia William S. Potter Professor of Law, presented "The New Audit Committee and its Financial Expert: Liability Issues under Federal and State Law."

Held Oct. 18, 2005, in the Rotunda, this program was open to up to 90 interested graduate and advanced accounting students, members of Beta Alpha Psi, as well as select other students and McIntire faculty. An informal social gathering with heavy hors d'oeuvres followed the session for participants interested in further dialogue.

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