The Diligent team

GRC trends and insights

Why your audit committee needs a financial expert (and how to find one)

The 2008 financial crisis exposed critical gaps in board financial oversight, with many directors approving complex financial statements they couldn't fully understand. This governance breakdown prompted regulatory action that fundamentally changed audit committee requirements through the Securities and Exchange Commission (SEC) requirements under Section 407 of the Sarbanes-Oxley Act.

These requirements have become even more critical as boards navigate expanded oversight responsibilities, including AI governance, cybersecurity risk and enhanced SEC disclosure requirements alongside traditional financial oversight. Today's financial experts must possess traditional accounting expertise while understanding emerging risks from technology implementation and evolving regulatory frameworks.

This guide will help you understand audit committee financial expert requirements by covering:

• What an audit committee financial expert is
• What qualifies someone as an audit committee financial expert under SEC definitions
• Why financial expertise matters for audit committee effectiveness
• Enhanced independence requirements for audit committee members
• Who should serve on your audit committee and when
• How to recruit and assess financial expert candidates

What is an audit committee financial expert?

An audit committee financial expert is a board member with specialized financial and accounting knowledge who serves on the audit committee to provide enhanced oversight of financial reporting, internal controls and external auditor relationships. This designation, established under Section 407 of the Sarbanes-Oxley Act, represents a higher standard of financial competency than the basic financial literacy required of all audit committee members.

Section 407 of the Sarbanes-Oxley Act establishes specific criteria for audit committee financial experts. The SEC's implementation rules provide a broader definition than originally proposed, allowing more qualified individuals to serve in this capacity.

An audit committee financial expert must possess all of the following qualifications:

• Deep understanding of GAAP and financial statements: The expert must demonstrate comprehensive knowledge of Generally Accepted Accounting Principles (GAAP) and the ability to read, analyze and interpret complex financial statements at a level comparable to the company's reporting requirements.
• Application of accounting principles: The expert must have the ability to assess how accounting principles apply to estimates, accruals and reserves — understanding not just the mechanics but the judgment required in financial reporting decisions.
• Relevant experience with comparable complexity: The expert must have experience preparing, auditing, analyzing, or evaluating financial statements that present accounting issues comparable in breadth and complexity to those the company faces. This experience may include actively supervising individuals engaged in these activities.
• Understanding of internal controls: The expert must comprehend internal control systems and procedures for financial reporting, including the design and implementation of controls that prevent and detect errors or fraud.
• Knowledge of audit committee functions: The expert must understand the role, responsibilities and operations of audit committees, including their relationship with independent auditors and management.

These qualifications must be obtained through experience in one or more of the following positions:

• Principal financial officer (CFO)
• Principal accounting officer (Controller)
• Public accountant or auditor
• Similar positions involving comparable financial oversight responsibilities
• Active supervision of individuals holding these positions

The definition recognizes that financial expertise can develop through various career paths. A qualified expert might be a former CFO, a retired audit partner, a controller who managed complex reporting, or an executive who supervised financial operations at a comparable scale.

Why financial expertise matters for audit committees

Financial expertise on audit committees provides immediate and measurable benefits across multiple governance dimensions. Organizations with qualified financial experts demonstrate stronger financial reporting quality, more effective risk management and better stakeholder confidence.

1. Enhanced financial reporting quality

Audit committee financial experts bring specialized knowledge that improves the quality and reliability of financial statements. These experts can identify accounting issues early, challenge management assumptions effectively and ensure proper application of accounting standards across complex transactions.

"Audit committees are not used to working with sustainability and climate risk data, so you're going to have to do some education about how to understand this data," says Heindrek Allen, ESG Manager at Magnit Global. This observation extends beyond ESG to all specialized reporting areas where financial expertise helps committees navigate new disclosure requirements.

Companies with audit committee financial experts typically experience fewer financial restatements, more conservative accounting estimates and stronger internal controls. The expert's ability to ask informed questions and understand technical responses creates accountability that elevates reporting standards across the organization.

2. Improved risk identification and management

Financial experts recognize risk indicators that others might miss. They understand how operational decisions affect financial reporting, how market changes impact valuation assumptions and where control weaknesses might hide in complex processes.

This risk perspective proves particularly valuable during periods of change — mergers and acquisitions, new business models, international expansion, or regulatory shifts. Financial experts help committees anticipate problems rather than react to crises.

3. Stronger stakeholder confidence

Investors, lenders and analysts view audit committee composition as a key governance indicator. The presence of a recognized financial expert signals commitment to financial oversight and reduces perceived risk.

For public companies, independent directors' reputations depend on effective governance. They evaluate hundreds of companies annually and recognize immediately when audit committees lack appropriate expertise. For pre-IPO companies, institutional investors and underwriters assess audit committee quality as part of investment readiness.

4. More effective auditor oversight

Financial experts can evaluate external auditor performance, challenge audit scope decisions, and assess the quality of work performed. They understand audit methodologies, can interpret audit findings in context and know which questions to ask about judgments and estimates.

This expertise proves essential when audit committees must assess auditor independence, evaluate significant accounting policies, or resolve disagreements between management and auditors. The expert's credibility with both parties facilitates difficult conversations and better outcomes.

Enhanced independence requirements for audit committee members

Independence standards for audit committee members continue to evolve beyond basic regulatory requirements. Recent policy clarifications establish more stringent criteria for former executives serving on audit committees.

Institutional Shareholder Services (ISS) implemented new guidelines for 2025 that establish a minimum five-year cooling-off period for former CEOs before they can serve on audit committees. ISS will recommend voting against any director who served as CEO within the past five years and is a member of the audit committee.

Even after the cooling-off period, independence is assessed case-by-case. Former CEOs must meet ISS independence classification criteria to qualify for audit committee service. These restrictions address potential conflicts of interest and ensure committees maintain objective oversight of financial matters.

These enhanced standards reflect investor expectations that audit committees should be completely free from management influence. Organizations should consider similar cooling-off periods for other executive positions, particularly those with direct financial reporting responsibilities.

The trend toward stricter independence requirements extends beyond former executives to other relationships that might compromise objectivity. Audit committees should regularly assess all director relationships and consider whether enhanced independence standards serve stakeholder interests better than minimum regulatory compliance.

Who should be on your audit committee?

Audit committees typically include three to seven board members, all independent directors with no management responsibilities. While only one member must meet the formal financial expert definition, overall committee composition should balance multiple perspectives and skill sets.

The audit committee chair

The chair should be a certified public accountant (CPA) or otherwise qualify as a financial expert under SEC criteria. The chair manages committee meetings, serves as the primary liaison with external auditors and often leads discussions with management about significant accounting matters.

Effective chairs combine technical accounting knowledge with strong communication skills and governance experience. They must facilitate difficult conversations, maintain committee independence and ensure all members can contribute effectively regardless of their financial background.

Committee composition considerations

Beyond the required financial expert, audit committees benefit from members with complementary expertise. Consider including directors with:

• Industry experience: Directors who understand the business model can better assess financial assumptions and evaluate operational risks that affect reporting.
• Technology and cybersecurity knowledge: Directors with technical expertise help committees evaluate digital risks as cybersecurity oversight increasingly falls under audit committee responsibilities.
• Risk management experience: Directors with enterprise risk backgrounds can connect financial reporting to broader organizational risk management frameworks.
• International experience: For multinational companies, directors who understand cross-border transactions, foreign exchange risks and international accounting standards strengthen committee effectiveness.

"You have to stand up an audit committee, a nom/gov committee and a comp committee. Having the people in place ahead of the IPO is critical. The underwriters will tell you, the lawyers will tell you to do it early," says John Egan, Partner at Goodwin Law.

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Enhance Audit Committee Oversight

Explore how AI-powered governance platforms support sophisticated audit committee management and regulatory compliance.

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Balancing expertise and accessibility

While technical expertise matters, audit committees must also facilitate constructive board dialogue. Avoid creating committees so technically specialized that other board members cannot engage meaningfully with financial discussions.

The best committees combine deep expertise with the ability to communicate complex financial matters clearly to the full board. Financial experts should translate technical issues into business implications that all directors can understand and discuss.

When financial experts become essential for audit committees

The need for audit committee financial expertise varies based on organizational stage, complexity and stakeholder expectations. Understanding these timing considerations helps companies build an appropriate governance infrastructure.

Pre-IPO preparation timeline

Companies preparing for initial public offerings should appoint qualified financial experts at least 12-18 months before their anticipated filing. This timeline allows the expert to participate in financial reporting process improvements, help build audit-ready controls and establish credibility with auditors and underwriters.

"With requirements nowadays for cyber, financial and diversity, you want to start early. It's not just a matter of having directors on the board. You want them in enough board meetings to see how you operate, to be able to learn the business," says Egan.

An early appointment provides other benefits. The financial expert can identify gaps in financial infrastructure, recommend system improvements and help management build processes that will satisfy public company requirements. Attempting to make these improvements during the S-1 preparation process creates unnecessary stress and delays.

Private company considerations

Private companies aren't required to have audit committee financial experts. Despite this, large private companies maintain audit committees, and many include qualified financial experts even without regulatory mandates.

Private companies should consider appointing financial experts when they:

• Prepare for significant funding rounds with institutional investors
• Implement complex accounting treatments or face difficult technical issues
• Operate in highly regulated industries with specialized reporting requirements
• Experience rapid growth that strains the financial reporting infrastructure
• Plan eventual exits through IPO or strategic acquisition

The investment in financial expertise often pays returns through better decision-making, stronger controls and increased stakeholder confidence, regardless of regulatory requirements.

How to recruit audit committee financial experts

Finding and recruiting qualified financial experts requires an intentional strategy. The best candidates bring not just technical credentials but also a governance mindset, industry knowledge and cultural fit with existing board dynamics.

Identifying qualified candidates

Begin with a clear understanding of what expertise your specific situation requires. A company with complex revenue recognition needs different expertise than one focused on inventory valuation or international tax planning. Define the technical areas where committee guidance would provide the most value.

Consider candidates from various backgrounds:

• Recently retired finance executives: Former CFOs and controllers often seek board opportunities and bring current knowledge of reporting standards and business finance practices.
• Public accounting professionals: Retired audit partners and senior managers offer deep technical expertise and broad industry exposure, though they may require more time to learn specific business models.
• Financial services executives: Banking, investment management and financial advisory professionals often have strong analytical skills and financial statement expertise applicable across industries.
• Industry specialists: Candidates with finance backgrounds in your specific industry understand the unique accounting challenges and business dynamics affecting your organization.

Assessment criteria beyond credentials

Technical qualifications alone don't ensure effective committee service. Evaluate candidates across multiple dimensions:

• Governance commitment: Does the candidate understand fiduciary duties, audit committee responsibilities and the difference between oversight and management?
• Communication skills: Can they explain complex financial concepts clearly to directors with varying levels of financial literacy?
• Time availability: Will they dedicate sufficient time to committee preparation, meetings and interactions with auditors and management?
• Independence mindset: Do they demonstrate willingness to challenge management, ask difficult questions and maintain objectivity under pressure?
• Learning orientation: Are they committed to staying current on accounting standards, governance practices and emerging risk areas?

Recruiting strategies

Professional search firms specializing in board recruitment can identify qualified candidates who meet specific criteria. These firms maintain databases of board-ready candidates and can conduct preliminary assessments of technical qualifications and fit.

Industry associations and professional organizations provide networking opportunities to identify potential candidates. CPA societies, financial executive groups and governance associations often facilitate board matching programs.

Additionally, personal networks remain valuable recruitment tools. Existing board members, advisors and professional contacts can recommend qualified individuals and provide insights about candidate capabilities and working styles.

Common challenges in audit committee financial expert compliance

Organizations face several recurring obstacles when establishing and maintaining audit committee financial expert compliance. Understanding these challenges helps boards develop effective solutions.

1. Limited qualified candidate pools

Finding directors who combine financial expertise, industry knowledge, independence and board experience proves difficult, particularly for smaller companies or those in specialized industries. The pool of qualified candidates willing to serve narrows further when considering diversity, geographic location and time availability factors.

Organizations can address this challenge by expanding their candidate search geographically, considering virtual participation options and being flexible about specific industry experience requirements when core financial competencies are strong.

2. Succession planning gaps

Audit committees often fail to plan for financial expert turnover until departure becomes imminent. This reactive approach leaves committees scrambling to find qualified replacements while maintaining continuity in financial oversight.

Effective succession planning identifies potential successors well in advance, develops existing committee members' financial knowledge and maintains relationships with qualified candidates who might join the committee when positions open.

3. Documenting qualifications appropriately

SEC disclosure requirements demand specific information about how individuals qualify as financial experts. Companies sometimes struggle to document relevant experience, particularly when experts gained qualifications through supervising financial functions rather than performing accounting roles.

Annual report disclosures should include clear descriptions of the experience and education that qualify individuals as financial experts. When claiming qualification through "relevant experience," provide sufficient detail about positions held, responsibilities managed and financial complexity handled.

4. Maintaining current expertise

Accounting standards, regulations and business practices evolve continuously. Financial experts must stay current with changes affecting the organization's financial reporting and control environment.

Audit committees should ensure financial experts receive ongoing education about new accounting standards, emerging risks and governance practices. Many organizations provide committee members with subscriptions to accounting update services, conference attendance opportunities and specialized training on critical issues.

How AI technology transforms audit committee financial oversight

Financial experts join audit committees to provide specialized oversight of financial reporting, internal controls and external auditor relationships. Yet many spend valuable meeting time requesting follow-up information, clarifying inconsistencies in materials, or tracking down audit findings scattered across email threads and shared drives.

Best-in-class governance platforms like Diligent eliminate these inefficiencies by centralizing audit committee work, automating compliance documentation and surfacing the financial risks that warrant expert attention.

Instead of managing information logistics, financial experts can focus on the sophisticated analysis and strategic questioning their expertise enables.

Comprehensive audit committee oversight and compliance monitoring

Diligent Audit Management supports end-to-end audit committee oversight processes by tracking findings, monitoring remediation progress and templating disclosure compliance. The platform connects internal audit work directly to committee reporting, ensuring financial experts see testing results, control deficiencies and management responses in real time rather than waiting for quarterly summaries.

Financial experts can track external auditor performance, monitor management's implementation of audit recommendations and maintain comprehensive documentation of committee oversight activities. The platform automates routine compliance monitoring while maintaining the structure and documentation that SEC disclosure requirements and Sarbanes-Oxley frameworks demand.

Intelligent meeting preparation and credential management

Diligent Boards maintains comprehensive repositories for director credentials, including the education, experience and qualifications that establish financial expert status under SEC definitions. The platform stores historical records that support annual report disclosures and provides audit trails demonstrating governance compliance over time.

Corporate secretaries can document how each financial expert meets the five qualification criteria — from GAAP understanding to internal control knowledge — with supporting evidence readily accessible for regulatory filings. When board composition changes or experts rotate off committees, the system maintains complete records that satisfy disclosure requirements and facilitate smooth transitions.

Diligent’s Smart Board Book Builder capabilities ensure audit committee financial experts receive materials in formats that facilitate effective review. Rather than spending hours compiling documents from multiple sources, experts can focus on financial analysis and risk identification that adds value to the organization.

The platform synthesizes raw financial data, audit findings and risk assessments into professional committee materials with one click. Financial experts access integrated dashboards showing key metrics, trend analysis and exception reporting that highlight areas requiring deeper investigation.

By automating routine documentation, compliance monitoring and materials preparation, Diligent frees financial experts to focus on the sophisticated analysis, strategic questioning and risk evaluation that justify their committee appointment.

Ready to transform your audit committee effectiveness with AI-powered financial oversight? Request a demo to see how Diligent supports financial experts while maintaining comprehensive compliance with SEC requirements.

FAQs about audit committee financial experts

What happens if a public company doesn't have an audit committee financial expert?

Public companies must disclose in their annual reports if they lack an audit committee financial expert and explain why. While not technically illegal, the absence signals potential governance weakness to investors and regulators. Companies without financial experts should explain what alternative oversight mechanisms provide adequate financial expertise and commit to recruiting qualified individuals.

What's the difference between "financial expert" and "financial literacy"?

Financial literacy is a broader requirement that all audit committee members must meet. It means the ability to read and understand fundamental financial statements. Financial expertise represents a higher standard requiring deep knowledge of GAAP, experience with complex accounting issues and understanding of internal controls.

All audit committee members should be financially literate, but only one must meet the financial expert definition.

Can the same person serve as a financial expert for multiple audit committees?

Yes, qualified individuals can serve on multiple audit committees simultaneously, provided they can dedicate sufficient time to each committee's responsibilities. However, over-commitment concerns arise when directors serve on too many boards. Companies should assess whether financial experts can provide adequate attention, given their total board commitments.

How do pre-IPO companies prepare audit committee financial expertise for public market transitions?

Pre-IPO companies should establish financial expertise 12-18 months before anticipated public offerings, ensuring experts understand both private company operations and public company regulatory requirements.

Early implementation supports due diligence processes and demonstrates governance maturity to underwriters and institutional investors.

What new responsibilities do audit committee financial experts face?

Financial experts must understand AI's impact on financial reporting, oversee cybersecurity risks affecting financial systems and implement enhanced ESG disclosure frameworks.

These expanded responsibilities require expertise beyond traditional accounting knowledge, encompassing technology risk management and regulatory compliance.

Ready to strengthen your audit committee oversight? Schedule a demo to see how Diligent supports committee effectiveness and financial expert compliance.