Dear Mr. Katz,
Subject: File No. S7-39-02
Proposed rule: Improper Influence on Conducts of Audits
We thank you for the opportunity to comment on the proposed rules for improper influence on conducts of audits, part of the implementation of the Sarbanes-Oxley Act (SOA). We consider the following comments as part of a constructive regulatory dialogue between the United States and the European Union because the Act has also important effects on US-listed EU companies and EU auditors.
The adoption of the Sarbanes-Oxley Act is a US reaction to US financial reporting scandals. The Act aims at restoring investor's confidence in US capital markets. The European Commission and our 15 Member States share these concerns and could in principle support many measures in the Act. This is also the case for Section 303 (a) of the Sarbanes-Oxley Act which prohibits officers and directors of an issuer, and persons acting under the direction of an officer or director, from taking any action to fraudulently influence, coerce, manipulate or mislead the auditor.
However, from a European perspective we have specific comments on two aspects of the proposed rules:
1. Specification of positions with regard to EU corporate governance systems
Because the SOA also affects US-listed EU companies, we would like the interpreting rules to section 303 (a) to extend to the different EU corporate governance systems that may differ significantly from the US board system, e.g. dual board systems consisting of a management and a supervisory board. In this context, more flexible, specific guidance for these EU corporate governance systems would be beneficial to allow clearer interpretations in the European environment. Without such clarity, EU companies would be left in an uncertain situation concerning whom these rules apply to. From an EU regulatory perspective, it is unacceptable that SEC rules only accommodate US companies when they are also applicable to EU companies. Consequently, there must be additional interpreting rules for EU corporate governance systems.
2. Auditor independence
The SEC describes the offering of contracts for non-audit services as a type of conduct that might constitute improper influence. The possibility of improper influence is given but it is disproportionate to mention the offering of contracts for non-audit services in connection with bribing, blackmailing and physical threats.
The SOA itself contains safeguards to prevent possible independence problems of auditors. Section 202 contains a pre-approval requirement by the independent audit committee for permitted non-audit services to an audit client. The pre-approval requirement is only waived under very specific circumstances. Performed non-audit services have to be disclosed to the public.
The European Commissioner Frits Bolkestein has already taken up the issue of auditor independence in his letter to former SEC Chairman Harvey Pitt in early November. The EU Recommendation on auditor independence provides a proper principles-based approach to avoid such independence threats. As a general safeguard it requires the disclosure of such non-audit services to a supervisory body and to the public in general. The auditor should also confirm in writing that he is independent and that his objectivity is not compromised. The EU therefore has an equivalent system.
These equivalent safeguards in US and EU approaches to auditor independence should provide a sufficient basis to prevent or mitigate independence problems regarding the provision of non-audit services to audit clients. Thus, we consider that the offering of non-audit services should not be associated with improper conduct if this happens within a framework that safeguards auditor independence.
We trust that our comments will help the definition of further SEC rules to be in the best interest of US and also EU companies and auditors with transatlantic business links.