October 30, 2002
Mr. Jonathan G. Katz
RE: File No. S7-40-02
Dear Mr. Katz:
We appreciate the opportunity to comment on the Commission's proposed rule on implementing the "financial expert" provision of the Sarbanes-Oxley Act.
We believe that Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (the "Blue Ribbon Committee") adequately addressed the issue of financial expertise and oversight in its 1999 report. The Blue Ribbon Committee clearly recognized the need for audit committee members to have a higher level of accounting and related financial expertise than other persons involved in corporate governance. In implementing the Blue Ribbon Committee's recommendations, the NYSE adopted a listing standard whereby at least one member (preferably the Chairman) of a listed company's audit committee must have "accounting or related financial management expertise, as the Board of Directors interprets such qualification in its business judgment." Rules adopted by the NASD and AMEX are slightly more specific and define financial literacy as "the ability to read and understand fundamental financial statements, including a company's balance sheet, income statement, and cash flow statement." Under the NYSE rules, a person who is or has been a chief executive officer, chief financial officer, or other senior corporate officer with financial oversight responsibility satisfies this criteria. At the very least, your proposed rule would add yet another layer of requirement, that of a "financial expert" which, given the existing NYSE, NASD and AMEX rules, is superfluous and confusing.
At Technitrol, we have numerous directors who are financially literate and able to read and understand financial statements in a comprehensive way. Such current directors include someone with a career in investment banking, four current or former Chief Executive Officers of global manufacturing companies, (in addition to the current Chief Executive Officer of Technitrol, Inc.), a former President and Chief Operating Officer and the Dean of a major business school. Incredibly, under your proposed rules, none of these individuals, each having significant experience in interpretation and analysis of financials statements, would qualify as a financial expert. Conversely, there are countless persons who qualify as a financial expert under the proposed rules, but would not bring any increased level of financial expertise or general governance contribution to our Board other than the fact that they are, generally, accountants. This is evident by the number of unsolicited offers our CEO has already received from unknown and relatively obscure accounting practitioners looking for revenue opportunities resulting from the proposed rules. These practitioners have no experience in our industry and it is likely that they have very little appreciation for the responsibilities associated with the position. However, they have audited or prepared financial statements of manufacturing companies, really the sole criteria they need to be a financial expert for our purposes. We feel compelled to point out that the previous CFOs of WorldCom, Tyco and other companies recently involved in financial scandals, would have qualified as financial experts. Yet, the definition of financial expert does not include qualifications regarding ethics or good business judgment. We believe that the concept and the totality of the specific recommendations embraced by the Blue Ribbon Committee are sufficient for purposes of enabling the Board, through its Governance Committee and Audit Committee, to apply the appropriate level of governance and oversight to a company's financial reporting process. We understand that the Sarbanes-Oxley Act would require companies to explain the absence of a financial expert if, in fact, there is no such financial expert on the audit committee. We are not convinced that a financial expert, as defined in the proposed rules, would add any significant measure of expertise or oversight to our Board, as it is currently comprised. Accordingly, we may disclose in further detail the financial expertise already contained on our Board and decline to nominate a director solely for this purpose.
While we are opposed to the proposed definition of "financial expert", we offer the following in response to certain questions for comment included in the release.
Thank you for the opportunity to comment on the proposed rules and to allow issuer feedback to be considered prior to finalizing the rules.
Drew A. Moyer