Transparency International-USA
The Coalition Against Corruption
1112 16th Street, N.W., Suite 500, Washington, D.C. 20036
Tel: 202-296-7730 Fax: 202-296-8125 tiusa@aol.com www.transparency-usa.org
February 14, 2003
Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609
Dear Mr. Katz:
Transparency International-USA (TI-USA) is pleased to comment on the above referenced proposed rule and will follow with interest and comment on additional SEC rule proposals to implement the Sarbanes-Oxley Act of 2002 ("the Act"). TI-USA supports the SEC's efforts to improve the quality and transparency of disclosure, and we urge it to consider the attached TI-USA Statement on Corporate Governance and Accounting Reform as it proceeds with the rule-making process.
TI-USA supports the efforts of the SEC to address the growing concerns about corporate governance and fraudulent financial reporting. In particular, we support the proposed rules implementing the Sarbanes-Oxley Act requirements that would prohibit the national securities exchanges and associations (the self-regulatory organizations or "SROs") from listing securities of any issuer that is not in compliance with the following standards:
- All audit committee members must be a member of the board of directors and be independent i.e., audit committee members may not receive any remuneration from the issuer other than compensation as a director.
- The audit committee must have direct responsibility to appoint, compensate, retain and oversee the issuer's registered public accounting firm.
- The audit committee must have established procedures to address complaints on accounting, auditing and internal control matters, including confidential, anonymous submissions by the issuer's employees.
- The audit committee must have authority to engage outside advisers (e.g., independent counsel), and the issuer must provide the audit committee with funding (as determined by the audit committee) to compensate the independent auditor and any advisors.
Audit Committee Member Independence
Overall, we support the requirement of audit committee member independence and believe such a requirement is consistent with our attached statement. TI- USA has the following comments in response to the questions posed regarding audit committee independence:
- We believe it is appropriate to have a company's board of directors make the determination of whether its audit committee members are independent, using outside counsel or consultants where it might be desirable, to ensure that each qualifies for membership on the committee. We also believe that it would be appropriate for the issuer to disclose the board's determination in their proxy statement. Inclusion in the proxy statement would provide shareholders and investors with a single location for relevant information on a company's officers and directors.
- We believe a look back period of at least 3 years related to relationships between the audit committee member and issuer would be appropriate, recognizing that there may be situations where a longer look back period would be advisable. TI-USA believes that such a period is necessary to consider and address past material relationships between an audit committee member and the affect the member's independence.
- We further believe that it would be appropriate to expand the criteria for independence to prohibit all transactions and relationships with the audit committee member apart from the committee member's capacity as a member of the board. We believe the audit committee member's independence is paramount for a company's corporate governance structure. Allowing for any such transactions (e.g., ordinary course relationships) will increase the likelihood that such arrangements could impair the independence of members of the audit committee.
Procedures for Handling Complaints
We support the requirement that each audit committee must establish procedures to address complaints on accounting, auditing and internal control matters. Such a requirement is critical to an effective corporate compliance program. However, we recommend the SEC, through its proposed rules, regulations and interpretations thereof, explicitly state that complaints about potential violations of applicable laws and regulations are to be included in the above procedures.
From TI-USA's perspective, it is essential that companies have compliance procedures to monitor compliance with laws and regulations, including anti-bribery compliance policies and procedures. TI-USA believes that such compliance procedures are an essential element of internal control. The recommendations that TI-USA submitted to the OECD as part of the accounting, auditing and internal control review of US enforcement of the OECD Anti-Bribery Convention are similar in many respects to the legislative and regulatory reforms currently underway in the US.
Determining Compliance with Proposed Standards
We concur with the requirement included in the proposed rule that would require an issuer to promptly notify the SROs after becoming aware of any material noncompliance with proposed listing standards. We believe that it would be appropriate to require an issuer to disclose to the SRO on a quarterly basis, whether they continue to be in compliance with the listing standards being proposed. Such a requirement would ensure that the issuer and its board are constantly monitoring relationships between it board members and the company.
Updates to Existing Audit Committee Disclosure
The proposed release currently requires additional disclosure by companies taking advantage of one of the proposed exemptions for audit committee member independence in both their annual reports and in proxy statements. Further, the rules would allow for the disclosure to be incorporated by reference into their annual report from a timely filed proxy statement. We believe that the requirement for inclusion of the disclosure in the proxy statement is appropriate, as it would provide shareholders and investors with a single location for relevant information on a company's officers and directors.
We support the disclosure requirements for those issuers taking advantage of one of the limited exemptions as proposed. We believe that disclosure by the issuer "of whether, and if so, how, such reliance (on the exemption) would materially adversely affect the ability of their audit committee to act independently and to satisfy the other requirements of proposed Exchange Act Rule 10A-3." would be relevant disclosure for shareholders and potential investors.
Lastly, we believe that the clarification included in the proposed release, requiring registrants that do not have a separately designated audit committee, or committee performing similar functions, to provide disclosures required under proposed Exchange Act Rule 10A-3 with respect to all members of its board of directors, is necessary and appropriate.
Conclusion
We believe the rules being proposed by the SEC that are addressed in this letter will contribute to improved corporate governance, restoration of investor confidence and the credibility of the financial markets. We would be pleased to discuss this comment and attached statement with the Commission or its staff at their convenience.
Fritz Heimann, Chairman
Transparency International-USA |
Thomas L. Milan, Director
Transparency International-USA |
cc. Harvey L. Pitt, Chairman
Paul Atkins, Commissioner
Roel Campos, Commissioner
Cynthia A. Glassman, Commissioner
Harvey J. Goldschmid, Commissioner
Transparency International-USA
The Coalition Against Corruption
1112 16th Street, N.W., Suite 500, Washington, D.C. 20036
Tel: 202-296-7730 Fax: 202-296-8125 tiusa@aol.com www.transparency-usa.org
TI-USA Statement on Corporate Governance and Accounting Reforms
Transparency International is an international anti-corruption organization headquartered in Berlin, Germany, with over 80 chapters promoting transparency and accountability in government and the private sector worldwide. In TI's view, US corporate governance and accounting scandals have impaired US leadership and raised questions about the US system as a model for disclosure and ethical business practices. They have made it more difficult for the United States to promote good governance internationally and serve as an excuse for countries resisting action to reform corporate governance and strengthen regulatory oversight.
Prompt, effective reform here at home is indispensable to US credibility abroad. The United States is setting an example by acknowledging weaknesses in its system. Adoption of needed reforms would serve as a model for similar reform efforts which are also needed in other countries.
The true test will be whether, over the next few months, the Administration, Congress, regulators, stock exchanges and key players in the private sector -- corporations, accountants, lawyers, securities analysts, underwriters and rating agencies -- actually take meaningful steps to strengthen integrity and accountability. Legislation is necessary for some aspects of reform, for example to ensure that the SEC has the appropriate legal basis to act. The Justice Department and SEC should forcefully prosecute offenders, and Congress should provide adequate resources for them to do so. At the same time, companies, listed and non-listed, must direct their efforts at ensuring an ethical corporate culture, going beyond the letter of the law and providing incentives that reward compliance, transparency and accountability.
From TI's perspective, it is essential for companies to have effective internal controls and for there to be strong, consistent international systems for corporate accounting and auditing. Transparency International-USA urges prompt action on the following:
Corporate Governance:
- Companies should adopt effective corporate compliance programs, covering compliance with laws and regulations and with ethical standards. Such programs should have the active support and participation of senior management and be provided with adequate resources. Compliance programs should include training requirements, procedures for reporting illegal or unethical behavior, and strong monitoring and enforcement mechanisms.
- Oversight over corporate compliance programs should be vested in an audit or governance committee comprised entirely of directors who are independent of management. This committee should have the requisite authority, expertise, time and support to carry out its mandate.
- SEC should require companies to include in their annual reports an assessment by management, reviewed by the audit committee, of the adequacy of internal controls, including corporate compliance processes.
- Companies should establish an internal audit function with a reporting channel directly to the audit committee. Among its responsibilities should be monitoring compliance programs and ensuring the adequacy of internal controls.
Accounting and Auditing:
- SEC should require CEOs and CFOs to certify the accuracy of financial statements and disclosures in periodic reports. CEOs and CFOs should be subject to criminal penalties for misleading auditors or the public.
- US generally accepted auditing standards should require auditors to treat a significant deficiency in corporate compliance processes as a matter reportable to the audit committee.
- The audit committee should be comprised entirely of directors who are independent of management, and it should have the requisite authority, expertise, time and support to carry out its mandate. It should have sole responsibility for the selection of outside auditors, for their compensation, and for the scope of their duties; the auditors should report to the audit committee. The audit committee should ensure that auditors are independent and not impaired by conflicts of interest, including placing restrictions on hiring of external auditors by the company.
- Congress should create an independently-funded public oversight board for the accounting profession, operating under the aegis of the SEC. The board should have confidentiality privilege and be protected against liability. It should have the power to set ethics standards and independence requirements, including conflict of interest rules, to conduct quality control reviews of firms, and to impose penalties. In addition, the public oversight board should have responsibility for setting auditing standards, which may be delegated to an expert body over which it has oversight.
- FASB should be provided with independent funding and the ability to promptly bring rules up to date to respond to changing circumstances. Convergence to a stronger, internationally recognized set of accounting standards is essential. To that end, consideration should be given to achieving the best balance between the IASB principles-based approach and the US GAAP rules-based approach.
Fritz Heimann, Chairman
Nancy Zucker Boswell, Managing Director
July 22, 2002
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