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

November 8, 2002

Mr. Jonathan G. Katz


Securities and Exchange Commission

450 5th Street, NW

Washington, D.C. 20549-0609

Commission File No. S7-39-02
Improper Influence on Conduct of Audits
Release No. 34-46685; IC-25773

Dear Mr. Katz:

Transparency International-USA (TI-USA) is pleased to comment on the above referenced proposed rules 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.

We have enclosed a copy of TI-USA's July 22 statement on corporate governance and accounting reform, submitted to the House-Senate conference committee considering reform legislation. We urge the SEC to consider this statement as the SEC proceeds with the rule-making process since the recommendations contained in this statement parallel many of the requirements of the Act.

TI-USA supports the efforts of the SEC to address the growing concerns about fraudulent financial reporting. In particular, we support the proposed rules implementing the Sarbanes-Oxley Act requirements that make it unlawful for any officer or director of an issuer, or any other person acting under the direction thereof, to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of that issuer for the purpose of rendering such financial statements materially misleading.

Definition of an Officer

We believe the definition of "officer" in Rule 3b-7 under the Securities and Exchange Act of 1934 should be expanded to include an issuer's general counsel or chief legal officer. General counsel has become a common title in most public companies and may or may not also include the title vice president. General counsel typically play a key role in how contracts are accounted for, judgments with respect to potential contingent liabilities and compliance with laws and regulations, as well as other significant matters related to the preparation of financial statements. We believe Congress intended Section 303 of the Act to cover those individuals within the issuer's organization that typically have influence over the preparation of financial statements. For this reason, we believe the definition should be expanded to cover an issuer's general counsel.

Scope of Services Covered by the Rule

Currently the proposed rule 13b2-2(2)(ii) covers improper influence of an accountant engaged in the "the preparation or filing of any document or report required to be filed with the Commission." While we presume that the auditor's report on internal control that will be required to be filed with the Commission in accordance with Section 404 of the Act will be included, we believe this report is of sufficient significance that the rule should be amended to specifically state that such conduct would also be prohibited in connection with an auditors attestation engagement related to an issuers internal controls.

Specific Requests for Comment

We would also like to comment on the following question in the rule proposal that we believe warrants further consideration.

Q- Should we replace the statement in subparagraphs (b)(1) and (c) that no person acting "under the direction" of an officer or director shall improperly influence the auditors of the issuer's financial statements, with a statement that no person acting "at the behest of" or "on behalf of" an officer or director shall improperly influence the auditors. Such language might better indicate that no specific direction by an officer or director is required to violate the proposed rules.

We believe that the use of the words "on behalf " instead of "under the direction" is preferable in subparagraphs (b)(1) and (c) of rule 13b2-2. We concur with the Commission's position that such language would clarify the fact that no specific direction by an officer or director would be required to violate the proposed rules. This language would serve to broaden the scope of those individuals who would be prohibited from such conduct by including those individuals that engaged in such conduct even though they were not given specific direction, but instead were acting as the believed they were directed to act.


We believe it is appropriate for the SEC to expand its regulatory authority and enforcement options with respect to the types of conduct discussed in this rule and that the rule will contribute to the restoration of investor confidence and the credibility of the financial markets. In addition, we believe the rule is consistent with our July 22 statement on corporate governance and accounting reform that "CEOs and CFOs should be subject to criminal penalties for misleading auditors or the public."

We would be pleased to discuss the attached statement with the Commission or its staff at your 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

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