November 29, 2002
Via E-mail: email@example.com
Jonathan G. Katz, Secretary
Re: File No. S7-40-02
On behalf of Bank One Corporation, I am pleased to have the opportunity to respond to the Commission's request for comment on the proposed rules implementing Section 407 of the Sarbanes-Oxley Act (the "Act"). Section 407 of the Act requires the Commission to issue rules defining the term "financial expert" and requiring a public company to disclose whether or not (and if not, why not) its audit committee includes at least one member who is a financial expert.
Bank One appreciates the challenge presented to the Commission to define an audit committee financial expert. Unfortunately, however, we believe the qualifications of a financial expert, as set forth in the Releases, are unrealistic, are not required by the Act, and should be significantly modified to accommodate appropriate, dynamic qualifications.
I The Definition of Financial Expert
The proposed definition of financial expert, although appearing upon initial review to provide boards of directors considerable latitude to determine who is a financial expert and the ability to weigh a number of factors in making that determination, is, in fact, restrictive to the point that probably only a very limited number of individuals will qualify as financial experts.
Without reciting each factor and attribute listed in the proposed rule, it is clear that to be deemed a financial expert an individual must be among a select group of people, many of whom may either have no interest in serving on a corporate board of directors and its audit committee or lack the qualifications, attributes and experiences diversified public companies generally require when considering director candidates. Moreover, for companies engaging in businesses in specific industries, such as insurance, energy or banking enterprises, an already limited pool of potential financial experts will be further reduced by the requirement that the individual selected have "industry specific expertise," that is, experience preparing or auditing financial statements that present accounting issues that are comparable to those raised by the company's financial statements.
We strongly believe that the definition of financial expert should be expanded so as to include a larger pool of qualified candidates. Such an expansion is necessary to allow public companies to attract qualified directors who can satisfy all the requirements appropriate to service on an audit committee while, at the same time, fulfilling the intent of the Act that audit committees have at least one person with the knowledge and sophistication to understand financial statements and the accounting policies that underpin them. One means of expanding the pool would be to modify the qualifications so that it is not a requirement that a financial expert have been a public accountant, auditor, principal financial officer, controller or principal accounting officer of a public company or have experience in a position performing similar functions. Instead, a financial expert would include any person that the board of directors, after considering the business and financial statements of the issuer and the totality of experiences of the individual, determines can review and analyze financial statements prepared in accordance with GAAP. A qualified financial expert might have gained such experience in a variety of ways, including as a director or trustee of a not-for-profit organization (including membership on a finance or audit committee), or as an official of a local government body, which often involves the review of complex financial circumstances. We would also encourage the Commission to retain the concept that experience as a public accountant, auditor, principal financial officer, controller or principal accounting officer be considered as one of the criteria a board of directors could consider in determining whether a given individual is a financial expert.
We also believe the proposed rule should be modified to provide that a person who has supervised those who have performed, but not actually herself performed, functions similar to those of a public accountant, auditor, principal financial officer or principal accounting officer of a public company, qualifies as a financial expert. This modification would permit present and former chief executive officers of public companies to qualify as potential financial experts, even though they themselves may not have directly prepared or audited financial statements. Such a modification of the rule would satisfy what we assume to be the intent of the proposed rule that a financial expert have the background and experience necessary to properly monitor the performance of a company's internal accountants and independent auditors. Moreover, given that the Act now requires public companies' chief executive officers (as well as chief financial officers) to personally certify the accuracy of the company's financial statements, it would be inconsistent with the Act for the Commission not to recognize such individuals as financial experts. We also note that such a change in the proposal would be consistent with the similar standard required by NASD Rule 4350(d)(2)(A) that requires each issuer to have at least one member of its audit committee with experience or background which results in financial sophistication, such as having been a chief executive officer.
We further suggest that the current proposal requiring that a financial expert be experienced in "preparing and auditing" financial statements be modified to provide that such an expert be experienced in "preparing, auditing, reviewing or analyzing" financial statements. We believe a board may properly conclude that, all qualifications considered, an individual experienced in reviewing or analyzing financial statements is as much a financial expert as one who is experienced in preparing or auditing financial statements.
We believe our suggested revisions to the proposal are consistent with Section 407 of the Act and Congressional intent. Section 407(b) contains a non-exclusive list of factors to be considered by the Commission in defining a financial expert. Nothing in the section mandates that any one factor included in the section be a prerequisite to achieving financial expert status, nor is there any suggestion in the Act that additional or other factors not be considered in determining financial expert status, and we urge the Commission not to read into the Act any such requirements.
II Time Frame for Compliance
Companies will be challenged near term in attracting financial experts to their boards. Unless the proposed rules include a significant period after the January 26, 2003 effective date in which to comply, most registrants, particularly small to mid-sized businesses, will be forced either to (i) disclose that they do not have a financial expert on their audit committee, and the reasons why, or (ii) quickly add a person who seems to satisfy the financial expert definition who is willing to serve on the board and audit committee. Such an addition will likely occur without sufficient time to identify and attract the best person available, including those satisfying other important board qualifications and objectives.
The boards of directors and audit committees of many public companies are comprised of successful, industrious, conscientious, well-educated individuals from a variety of disciplines and experiences. Such boards are necessary and appropriate to serve the myriad needs and considerations of large and diversified public companies. Notwithstanding the extensive credentials and financial sophistication of individuals on these boards, many do not currently have a public accountant, auditor, principal financial officer, controller or principal accounting officer. As a result, unless the proposal is modified or additional time for compliance is provided, many public companies may soon be competing with one another to secure the services of individuals with both the necessary credentials and willingness to serve as an audit committee financial expert. Given the possibility that board service in today's environment may not be as attractive to candidates, and that board schedules are more demanding and often less flexible (and may conflict with pre-existing obligations of candidates) the competitive race this proposal fosters is not conducive to thoughtful corporate governance.
Accordingly, we propose that at a minimum the financial expert requirement for audit committees not be effective until, at the earliest, the deadline for filing the Form 10-K for fiscal years ending on and after December 31, 2003. This time frame is consistent with the Act and Section 407 as the section does not mandate an effective date for the rule.
In conclusion, we believe that public companies must continue to identify, nominate and elect directors that satisfy a myriad of needs and, accordingly, view any rule requiring a potentially "single purpose" director with concern. Notwithstanding this concern, we believe that a requirement to include a financial expert on a board's audit committee can be constructive, provided that there is an ample pool of individuals meeting the qualifications of a financial expert from which to choose and there is sufficient time in which to make a meaningful selection. We believe, however, that the current proposal unnecessarily constricts the pool of individuals who would bring financial expertise to public company audit committees and believe the qualifications of such a financial expert can and should be expanded as and for the reasons set forth above.
I hope the views expressed in this letter will be helpful to the Commission as it makes its decisions with respect to the proposed rules. Thank you for considering our views. If you need clarification or further information, please do not hesitate to contact me at (312) 732-3551.