It's coming up on a year since the SEC and major stock exchanges started cracking down on "financial literacy" requirements for U.S. board audit committees. So has your committee (and particularly your committee chair) caught up with what it needs to know?

To help you find out, Financial Executives International has put together a terrific online "Financial Literacy and the Board" test that quizzes your audit committee directors on some essential concepts and standards. You can download the FEI Financial Literacy Test at The 24-question test will take you about 15 to 30 minutes, and should be taken with no outside aids.

For a warm-up, here are a few samples to quiz your audit savvy.

  1. What is the purpose of private meetings between the audit committee and the auditors, both external and internal?

    A. Facilitate private evaluation of the CFO
    B. Allow the auditors to express concerns to the committee without management present
    C. Allow the audit committee to press the external auditors for lower fees
    D. Reinforce the independence of the committee to the management team
  2. Cash flow per share is defined by GAAP as:

    A. Net income plus depreciation divided by shares outstanding
    B. Cash flow from operations on the cash flow statement divided by shares outstanding
    C. The change in cash in the balance sheet divided by the shares outstanding
    D. There is no GAAP definition. Analysts/companies devise one to suit their own purposes
  3. Illegitimate earnings management practices include:

    A. Overaccruing restructuring costs in one period and reversing those charges into income in future periods
    B. Building up various liability accounts (by accruing more expenses) in good quarters and decreasing them in bad quarters
    C. Recording revenue before the products or services have been delivered
    D. Postponing recognition of revenue into future quarters even though the firm has completed its earnings cycle
    E. All of the above

ANSWERS TO FEI QUIZ: 1-B, 2-D (There is no common measure of cash flow per share), 3-E (All the above - and all are being targeted by the SEC).

Copyright © 2001 Ralph Ward's Boardroom INSIDER