November 29, 1999
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Reference File Number S7-22-99, Proposed Rule: Audit Committee Disclosure
Dear Mr. Katz:
The Securities and Exchange Commission's ("SEC") release of the proposed rule regarding Audit Committee Disclosure solicited public comment regarding the various provisions of the proposed changes. Computer Sciences Corporation ("CSC") supports the SEC's goals and efforts in promoting investor confidence in the integrity of financial reporting and enhancing the reliability and credibility of financial statements by promoting quality financial reporting.
In our opinion, the vast majority of registrants are accurately reporting financial results and presenting financial statements with appropriate disclosure. As Mr. Lynn Turner of the SEC said at the FEI sponsored teleconference on materiality, "We think most of the people do it right." We are concerned that portions of the proposed rule and the general thrust of recent rulemaking are adding compliance effort for those registrants "doing it right" when the real target is the small minority of registrants not presenting accurate financial results and statements. Indeed, the continued drumbeat of the SEC comments and rules about the "bad companies" may be counterproductive to the SEC's goal of increasing investor confidence in the public securities markets. With the above as a general observation, detailed below are specific observations and suggestions regarding the proposed rule for your consideration.
A. Pre-Filing Review of Quarterly Financial Statements
As noted by the SEC, major corporations already are subject to pre-filing reviews by the "Big 5" firms, but few currently disclose the review in order to avoid attaching a report on the independent auditors' review to the Form 10-Q. We are concerned that disclosing the review with the requirement to include the accountants' report and the potential requirement to review the quarterly financial statements with the Audit Committee will add additional effort and complexity to the 45 day Form 10-Q process. Without these additional requirements, multinational companies already face significant time and quality assurance challenges, and we therefore also suggest that there should be no attempt to shorten the 45 day time frame for submission of Form 10-Q as the SEC has contemplated. Adding these requirements may actually result in less timely information to investors as companies may take additional time before the "earnings release" and publish results much closer to the Form 10-Q filing deadline. We, for one, would do so. Also, we do not believe that new formal requirements for interim reviews will materially shift work activity, or any cost, from the year-end audit process.
B. The Audit Committee Report
The Audit Committee Report rule as proposed will significantly blur the public's perception of the roles and responsibilities of management, the Audit Committee and other members of the board of directors. It is currently clear, and should remain so, that the financial statements are the responsibility of company management, and that fair presentation is not an optional obligation that is then enforced by the company's audit committee. Current regulations require extensive disclosure and discussion by management. The financial statements are subject to audit on an annual basis by independent public accountants. The Audit Committee should not then be required to state that it is unaware of misleading or untrue statements or omissions. Assuming those circumstances came to the Audit Committee's attention, the statements and disclosures would be modified before release to the public to solve the matter. Therefore, there are unlikely to be any Audit Committee Reports providing information about disagreements; instead, the report is likely to become a boilerplate disclosure.
Should any report be required, the report should be on an annual basis and be part of the Form 10-K, rather than the proxy statement, to keep financial disclosures together. We do not agree with requiring signatures above the Audit Committee member names. All directors already sign the 10-K. Why would one set of directors be held to an implied higher standard than other directors, who do not have to file a second signature? Such dual signatures would imply that it is acceptable for non-audit committee member directors to sign a 10-K with misleading or untrue statements or omissions. Further, in today's legal environment, we are gravely concerned that these additional requirements will hurt our ability to attract and retain the highest caliber board members possible.
C. Audit Committee Charters
CSC has no issue with disclosure as to the existence of a charter or to its availability as an appendix to the proxy statement. Frequency of presentation should be no more than once every three years, unless the charter has changed, in which case, it should be included with the next proxy statement. The disclosure of the charter may be helpful to the public understanding of the audit committee's role; however, our expectation is that the charters will look very similar as companies "gravitate toward the middle" to minimize liability.
We agree with the SEC's concern that requiring a statement as to compliance with the charter will result in an undesired result of even more "watered down" charters than implied in the previous paragraph as companies focus on minimizing liability (see "safe harbor" discussion below). Audit committees should have the ability to have a broad range of discussions with management and independent auditors. Requiring written statements as to compliance with the charter will result in more structured discussions in order to minimize potential liability.
D. Disclosure About "Independence" of Audit Committee Members
CSC supports the current NYSE proposals.
E. Proposed Safe Harbors
Any change in the rules must ensure that "safe harbors" are adopted. The SEC has indicated that it does not believe that the disclosure requirements will result in increased liability exposure. Our concern with the proposed rules, combined with today's litigious environment, is that fewer qualified directors will be willing to serve as audit committee members due to either real or perceived increased liability. Accordingly, if any of these increased requirements are adopted, the service of these directors must be afforded "safe harbor" protection.
Thank you for the opportunity to comment.
Leon J. Level
Vice President, Chief Financial Officer and Director