Direct Dial: 215 841 4201
November 30, 1999
Jonathan G. Katz
Secretary
U. S. Securities and Exchange Commission
450 Fifth Street, N.W. Stop 6-9
Washington, DC 20549-0609
Via e-mail: rule-comments@sec.gov
RE: The Audit Committee Disclosure Release, No. 34-41987; File No. S7-22-99
The following comments are submitted on behalf of PECO Energy Company, a $5 billion, investor-owned Pennsylvania electric and gas utility and nationwide power marketer, which is listed on the New York Stock Exchange. We appreciate the opportunity to provide our views on the proposed rules implementing the recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees.
In large measure, the recommendations of the Blue Ribbon Committee reflect the existing governance practices of the PECO Energy Company Board of Directors and its Audit Committee. And we appreciate the efforts of the Blue Ribbon Committee and the Commission to identify issues concerning the appropriate role and responsibilities of audit committees. However, several of the Blue Ribbon Committee recommendations caused us serious concern, and we are pleased to see that the proposed SEC disclosure rules do not adopt them, or adopt them only with significant modifications.
For the most part, PECO Energy agrees with, and incorporates by reference the comments of the Business Roundtable and the American Society of Corporate Secretaries. We include in these individual comments those points about which we feel most strongly.
Audit Committee Report
We support the SEC's rejection of the Blue Ribbon Committee's recommendation to require the audit committee to certify that the financial statements conform with Generally Accepted Accounting Principles (GAAP). Unfortunately, the SEC's proposed alternative to GAAP certification also causes us serious concern.
The proposed rule would require the audit committee to certify that the financial statements do not contain an "untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances in which they were made, not misleading". The audit committee is not qualified to give such a legalistic "cold comfort", or "negative assurance" opinion. An audit committee can review the processes, satisfy itself that appropriate and well qualified people are in charge of the processes, and ask informed and probing questions, but it cannot be sufficiently informed to certify, or give negative assurances about every detail in the financial statements. Such a requirement would fundamentally change the responsibility of board members, from that of overseers of the adequacy of the financial reporting and review process to that of accountants and auditors, with ultimate responsibility for every detail in the financial statements. This proposal would effectively place the audit committee in the position of guarantor of the company's financial statements, and notwithstanding the safe harbors, would make audit committee members prime defendants in securities litigation. In our judgment, the proposal would increase audit committee members liability and make qualified directors less willing to serve on the audit committee.
We believe that the risks of requiring an audit committee report in the proxy far outweigh the potential benefits to investors. But if the SEC believes that some affirmation is required, we would prefer the alternative posed for comment that would require the audit committee to state that it recommended to the board that the financial statements be included in the Form 10-K. This alternative would ensure appropriate oversight by the audit committee without unduly increasing the liability exposure of members of the committee.
Pre-filing Review of Quarterly Financial Statements
We do not object to the proposal to require an SAS 71 pre-filing review of interim financial statements by the outside auditor. Nor do we oppose requiring an "attempted communication" of the results of the review with the audit committee or its chair prior to filing the Form 10-Q, or as soon as practical thereafter. However, it would be impracticable to require the review, or the communication, to take place prior to the release of earnings and we would strongly oppose any such requirement. It would run counter to the Commissions goal of having prompt financial information provided to the investment community after the end of the interim period. The final rules should make clear that companies are not required to delay their earnings release until after completion of the full SAS 71 financial statements or until the attempted communication with the audit committee, or its chair, has occurred.
Proposed Safe Harbors
We support the adoption of safe harbors to cover all of the proposed disclosures by the audit committee. However, we are concerned that the proposed safe harbors are not broad enough and afford no protection for liability under Exchange Act Rule 10b-5 or state corporation law. Broad safe harbors are necessary to assure present and potential directors that service on the audit committee will not result in increased liability. Should the Commission consider some form of audit committee report necessary, we request that it establish safe harbor protections as broad as those provided in the Private Securities Litigation Reform Act of 1995 and the Securities Litigation Uniform Standards Act of 1998.
Effective Date of Proposed Changes
We understand that the SEC may intend to act on this release by year-end 1999 and make the new rules effective for the upcoming proxy season. We respectfully request that the Commission defer the effective date of any new disclosure requirements until after the upcoming proxy season has been concluded. Until companies are aware of what the new rules will be, it makes no sense to adopt changes to their charters which ultimately may not be compliant with the new rules. The publication in the proxy of a charter that will soon be changed radically would seem to be of little value to investors. Audit committees should be given a reasonable amount of time after adoption of the new rules to study them and make any necessary changes in their charters and practices before they are obliged to make disclosures based on those new rules. We respectfully submit that there will be inadequate time for such adjustments if the new disclosure rules are made effective for the upcoming proxy season.
We appreciate the considerable effort that has been devoted to development of these proposals, both by the Blue Ribbon Committee and the Commission, and thank you for the opportunity to comment on the proposed rules. Please let me know if I can be of further assistance.
Very truly yours,
Katherine K. Combs
Deputy General Counsel and Corporate Secretary