September 29, 2004

Yikes! Three Audit Committee Meetings Per Quarter?

A member emailed me to share the NYSE’s interpretation of Section 303A.07(c)regarding the requirement that the audit committee discuss the annual/quarterly financial statements and MD&A. The comment period for the NYSE’s proposed amendments ends today.

The member asked the NYSE Staff to clarify a concern regarding the proposed change to Section 303A.07(c)(iii)(B) that inserts the phrase “meet to review and” before the current requirement “to discuss” – because he was worried that the audit committee will now be required to “meet” to review specific MD&A disclosures.

In response, the NYSE Staff stated that it interprets the existing standards – not the proposed standards! – to require audit committees to review a “relatively advanced” draft of MD&A at a meeting. These meetings can be held telephonically. This interpretation comes despite the fact that it is probably not readily apparent that the NYSE had always contemplated that audit committees would be holding meetings to review specific MD&A disclosures under Section 303A.07.

As you know, many companies schedule committee meetings (including audit committee meetings) around the regular board meeting schedule. Some companies have board meeting schedules that don’t coincide conveniently with the earnings press release and the Form 10-Q/K filing schedules. Such companies typically schedule two meetings of the audit committee each quarter: one to address the earnings release (including the financial statements) and another to review the Form 10-K/Q drafts. These meetings often are held telephonically.

During their second meeting, audit committees will discuss disclosures to be made under MD&A, but are unlikely to have a draft of the complete Form 10-K/Q filing – including MD&A – available at that meeting because it isn’t ready yet. In such instances, the practice is to discuss disclosures under MD&A generally and instruct management to circulate a draft to committee members as soon as possible. Committee members then are given an opportunity to comment on the draft and discuss it with management, but an additional meeting is not held. Apparently, those days are over and audit committees might have to hold a third meeting to review a “relatively advanced” draft of MD&A – or a more likely solution, push back the second meeting until the MD&A is sufficiently specific.

SEC Issues SAB 106 for Oil & Gas Companies

Yesterday, the SEC issued SAB 106 to express the Staff’s views regarding the application of FASB Statement 143, Accounting for Asset Retirement Obligations, by oil and gas producing companies following the full cost accounting method.

The Coming Non-Qualified Deferred Compensation Legislation

Today is the NASPP webcast – The Coming Non-Qualified Deferred Compensation Legislation – featuring Bill Sweetnam of the U.S. Treasury Department and Max Schwartz of Sullivan & Cromwell, who will explain how this legislation is still very much alive – and the dramatic impact it will have on equity compensation!