Q: An issuer has wholly-owned subsidiaries that also are issuers. The parent company has an audit committee. The wholly-owned subsidiaries do not have audit committees. Can the audit committee of the parent company function as the audit committee of the wholly-owned subsidiaries for purposes of satisfying the pre-approval requirements?

A: Yes. It is appropriate for the audit committee of the parent company to, in effect, serve as the audit committee of the parent company and the wholly-owned subsidiaries. In this situation, the subsidiary's disclosure should include the pre-approval policies and procedures of the subsidiary and, also should include the pre-approval policies and procedures of the parent company. It should be noted that this view does not extend to the fund industry in a manner that would permit an adviser's audit committee to pre-approve non-audit work on behalf of the funds. For more information, see Release No. 33-8220 (April 9, 2003), Standards Related to Listed Company Audit Committees.

Q: An issuer that is a listed company has foreign subsidiaries that are consolidated. The issuer's "principal" auditor is a member firm of a network of international accounting firms. Some of the foreign subsidiaries have statutory audits performed and, in some cases (depending upon location, size, etc.), the statutory auditor may be a firm outside the member firm's network. Any statutory audits performed by member firms are subject to audit committee pre-approval requirements. Do the issuer's pre-approval requirements run to the statutory non-network auditors for the foreign subsidiaries or should the issuer's pre-approval requirements run just to the "principal" audit firm?

A: The Commission's rules relating to listed company audit committees (see Release No. 33-8220 (April 9, 2003), Standards Related to Listed Company Audit Committees) require audit committees to approve all audit services provided to the company, whether provided by the principal auditor or other firms. Therefore, the issuer's pre-approval requirements run to the statutory auditors for the foreign subsidiaries. However, failure of the audit committee to pre-approve audit services to be provided by another non-network auditor would not affect the independence of the principal auditor. See also question 1 under definitions.

Q: The Commission's rules require the audit committee to pre-approve all services provided by the independent auditor. In doing so, the audit committee can pre-approve services using pre-approval policies and procedures. Can the audit committee use monetary limits as the sole basis for establishing its pre-approval policies and procedures?

A: Monetary limits cannot be the sole basis for the pre-approval policies and procedures. The establishment of monetary limits would not, alone, constitute policies that are detailed as to the particular services to be provided and would not, alone, allow for the audit committee to be informed about each service.

The Commission's rules include three requirements that must be followed in the audit committee's use of pre-approval through policies and procedures. First, the policies and procedures must be detailed as to the particular services to be provided. Second, the audit committee must be informed about each service. Third, the policies and procedures cannot result in the delegation of the audit committee's authority to management. The Commission’s rules require compliance with all three of these requirements.

Q: Can the audit committee's pre-approval policies and procedures provide for broad, categorical approvals (e.g., tax compliance services)?

A: No. The Commission's rules require that the pre-approval policies be detailed as to the particular services to be provided. Use of broad, categorical approvals would not meet the requirement that the policies must be detailed as to the particular services to be provided.

Q: How detailed do the pre-approval policies need to be?

A: The determination of the appropriate level of detail for the pre-approval policies will differ depending upon the facts and circumstances of the issuer. However, a key requirement is that the policies cannot result in a delegation of the audit committee's responsibility to management. As such, if a member of management is called upon to make a judgment as to whether a proposed service fits within the pre-approved services, then the pre-approval policy would not be sufficiently detailed as to the particular services to be provided. Similarly, pre-approval policies must be designed such that the audit committee knows what services it is being asked to pre-approve so that it can make a well-reasoned assessment of the impact of the service on the auditor's independence. For example, if the audit committee is presented with a schedule or cover sheet describing services to be pre-approved, that schedule or cover sheet must be accompanied by detailed back-up documentation regarding the specific services to be provided.

Q: Does the audit committee of the plan sponsor of an employee benefit plan have to pre-approve the audit of the plan?

A: No. Rule 2-01(c)(7) requires pre-approval of services provided to the issuer and the issuer's subsidiaries, but not pre-approval of services provided to other affiliates of the issuer that are not subsidiaries. Therefore, the independence rules do not require the audit committee of the plan sponsor to pre-approve audits of the employee benefit plans. Audit committees are not precluded, however, from establishing policies to do so.

Q: Are audit committees required to pre-approve services provided by the issuer's principal accountant to variable interest entities that are consolidated under FASB ASC 810 Consolidation (ASC 810)?

A: Yes. Rule 2-01 requires the issuer's audit committee to approve or establish pre-approval policies and procedures with respect to services provided by the accountant to the issuer or its subsidiaries. An entity that the issuer is required to consolidate under ASC 810 is subject to the pre-approval requirements.