Many audit committee members and chairs are voicing concerns these days about the proper level of financial expertise required to oversee the rapidly changing, and increasingly complex, range of financial issues companies face. How much technical accounting expertise should audit committees have in the current business environment?

For example, is it the responsibility of the audit committee chair or the designated financial expert to keep abreast of, and be proficient in, the steady stream of technical accounting pronouncements? How is that responsibility alleviated (if at all) by the use of outside experts: external auditors, lawyers, and consultants? As a long-time external auditor, and now chair of the audit committee at a $3 billion public company, this sort of thing weighs on my mind.

There was much discussion a few years ago when the Securities and Exchange Commission issued its proposed definition of a “financial expert,” including a discussion of whether a different term (such as “audit committee financial expert”) would be more appropriate. At that time, the American Institute of Certified Public Accountants proposed a list of factors to help determine whether an individual qualified as a financial expert. Some of the criteria: whether the person is a CPA; has served as a principal financial officer, controller, or principal accounting officer of a publicly held company; the level and amount of direct experience reviewing, preparing, auditing, or analyzing financial statements filed with the SEC.

Ultimately, the SEC removed the laundry list of factors when it issued its final rule. Your best answer to the question lies in Section 407 of the Sarbanes-Oxley Act; it finalized the definition of an “audit committee financial expert” as a person who has all of these attributes:

An understanding of Generally Accepted Accounting Principles and financial statements;

Experience applying GAAP in connection with accounting for estimates, accruals, and reserves;

Experience preparing or auditing financial statements that present accounting issues that are generally comparable to those raised by the registrant’s financial statements;

Experience with internal controls and procedures for financial reporting; and

An understanding of audit committee functions.

On the face of it, those all sound like reasonable criteria. But does having all these attributes adequately prepare the audit committee financial expert for the role he or she must fulfill today? I’m not so sure.

For example, consider three recent pronouncements from the Financial Accounting Standards Board: Financial Accounting Standard 157, Fair Value Measurement; FAS 142, Goodwill Impairment; and FAS 141, Business Combinations. All require in-depth knowledge and understanding of the accounting literature. While my background as a former Big 4 Audit partner and corporate controller of a publicly held company should make it easier for me to understand and apply the technical aspects of these pronouncements, it is still not a cakewalk. It requires a personal commitment on my part to devote the time necessary to stay informed of the intricacies of these pronouncements, so that I can understand the company’s accounting, the auditors’ interpretations, or the attorneys’ advice—and what questions I should ask. Steven West, an experienced board member, current chair of the audit committee of Cisco Systems, and personal friend of mine, has seen the complexity of the accounting literature increasing over the last few years. His quick take: “The designated audit committee financial expert’s responsibility to keep up-to-date with the accounting rules and regulations has increased significantly.”

Another example of the increased complexity in financial accounting is the often-discussed adoption of International Financial Reporting Standards here in the United States. IFRS represents a fundamental change for the U.S. accounting profession. The discontinuance of GAAP may potentially render current audit committee financial experts ineffective. An understanding of GAAP and financial statements will no longer be useful prerequisites for determining an audit committee’s financial expert. To fulfill his or her fiduciary responsibilities as a board member, an audit committee financial expert may have to make a choice: become more proficient or seek outside assistance.

Given the prolific and complex accounting and regulatory pronouncements, audit committees may determine that it is imperative that they (or the individual audit committee financial expert) retain and rely on experts with specific financial and accounting expertise, as opposed to requiring that the audit committee financial experts possess that knowledge themselves. Compensation committees hire compensation consultants to assist them in the performance of their duties; audit committees may evolve to a point where they hire IFRS experts or other outside experts to assist them in their oversight performance. Steven West emphasizes that audit committees have always had the right to hire any outside advisers or counsel they deemed necessary; this approach may now become more prevalent, he believes, especially with accounting pronouncements like IFRS.

I don’t believe any one-size-fits-all solution exists, and I’m confident that many other audit committee members feel the same. Many audit committee financial experts will migrate toward the technical accounting aspects, obtaining an in-depth knowledge of those areas in which their companies are involved, such as derivatives or other complex financial instruments. Some may choose to learn IFRS, while others may use the expertise of outside consultants. I would strongly recommend that an audit committee make an assessment of the technical accounting expertise that exists among the members of its committee, and supplement any gaps with outside experts.

The ultimate responsibility for audit committee members is to discharge their fiduciary duties and fulfill their critical role in overseeing the accuracy, integrity, and transparency of their company’s financial statements. The presumption that the directors acted in good faith, and in the honest belief that the action taken was in the best interest of the company, is the cornerstone of their duty of care and duty of loyalty. Careful and informed deliberation and reliance on one’s expertise may be one indicator of duty of care; engaging appropriate external experts may be another.