American Society of Corporate Secretaries

Comments on Proposed Rules Implementing Section 407 of Sarbanes-Oxley ("Financial Experts") Submitted on Behalf of the American Society of Corporate Secretaries

December 2, 2002


Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Dear Mr. Katz:

We are pleased to have the opportunity to comment on the Commission's proposed rules implementing Section 407 of the Sarbanes-Oxley Act (Financial Experts) on behalf of the American Society of Corporate Secretaries.

The Society has approximately 3,800 members representing approximately 2,500 corporations in the U.S. and other countries. Bringing a practical perspective to efforts to continually improve the effectiveness of corporate audit committees has been a focus of the Society for a number of years.

In 1998, the Society testified before the Blue Ribbon Commission on Improving the Effectiveness of Corporate Audit Committees. At that time, we stated the following views on audit committee responsibilities:

  • An effective audit committee is comprised of independent and diligent directors and has an open and candid relationship with management and the external auditors.

  • An effective audit committee is willing to ask tough questions of the internal and external auditors.

  • An effective audit committee will complement, not duplicate, the work of the internal and external auditors.

In 2002, we testified before the New York Stock Exchange's Corporate Accountability and Listing Standards Committee and emphasized similar views.

Despite the unfortunate events of Enron, WorldCom and their progeny, we continue to believe that recruiting accountants to sit on boards will not result in a marked improvement in corporate governance. We believe this approach fails to recognize that the role of the audit committee is one of oversight. We believe it would be much more beneficial for an audit committee to meet privately with the independent auditor asking questions such as those suggested by Warren Buffet (who himself would not meet the Commission's narrow definition of "financial expert."). Asking questions such as "If you were the CEO, what changes in accounting policy would you make?" would be more effective than requiring disclosure as to whether audit committee membership includes an individual who prepared or audited financial statements at some point in his or her career.

We recognize that the Commission is constrained, to some extent, by the legislative mandate of Sarbanes-Oxley. However, we offer the following specific comments on the proposed rules that we believe will allow the Commission to fulfill its mandate yet recognizes the practical environment in which audit committees function.

    1. Expand the proposed definition of "financial expert" to allow the Board to recognize high-level executive experience overseeing financial and accounting functions.

Section 407 of the Act specifies several attributes gained through a person's education and experience that the Commission should consider in crafting the definition of "financial expert". However, the proposed rules would mandate that an individual satisfy each of these attributes in order to be considered a financial expert. We suggest that the Commission replace its list of mandatory attributes with a more flexible standard that would allow boards to consider experience supervising the preparation of financial reports and financial statements rather than actually preparing or auditing such reports. While the proposal suggests that it might be possible for someone other than a professional accountant or CFO to qualify as a financial expert, the mandatory nature of the "factors" and "attributes" suggests that only a professional accountant or CFO could ever reasonably expect to qualify. Certainly the factors and attributes in the proposal would be useful in examining a person's qualifications, but should not be mandatory and should be expanded to include other experience such as the supervision or teaching of the preparation or auditing of financial reports.

We believe that it is important that audit committee members understand basic financial accounting concepts and their application to a company's financial statements. We also believe that it is critical that audit committee members possess business acumen, in addition to independence and integrity. We do not believe that it is necessary that an audit committee member have had past experience directly preparing or auditing financial statements. Given that the role of the audit committee is one of oversight, considering a member's experience with oversight of the preparation of financial statements seems appropriate

If the definition of financial expert is too narrow (as proposed), it may not accomplish the desired goal of getting most companies to have an expert on their audit committee. The narrower the definition, the larger will be the number of companies willing to disclose that they do not have an expert on their audit committee.

    2. Clarify that the concept of "comparable" in the proposed definition does not require that a financial expert have experience in the same industry as the issuer.

The proposed rules would require financial experts to have experience in the accounting for estimates, accruals and reserves that are "generally comparable" to those used in the issuer's financial statements. We request clarification that this language does not require that "comparable" experience be in the same or similar industries as the company. Seeking a "financial expert" from competitors, suppliers or customers of the company would raise a number of antitrust and independence issues. Rather, we suggest that "generally comparable" be interpreted by the board to include other publicly traded companies or companies of generally comparable size, complexity or geographic reach, as the board deems appropriate.

    3. Give the Board of Directors flexibility regarding disclosure of the name of the financial expert.

We do not believe there is any added benefit to mandating disclosure of the identity of a "financial expert". We suggest that the Board be given discretion regarding specific identification in order to preserve the collaborative nature of the board relationship and to avoid the concept of a "second-class" director who is valued primarily for his/her designation as a financial expert.

    4. Provide a Reasonable Transition Period.

We believe that the Commission should provide a transition period to allow time for recruitment of a "financial expert". If a board decides to recruit a financial expert, sufficient time will be needed to identify the search criteria and select an appropriate candidate. In normal circumstances, months can be required to identify and recruit a qualified director who is a good match for the needs, style and personality of a given board. This time requirement is increased by the hesitation people may now have about the potential added liability that accompanies being identified as a financial expert.

Adequate transition time will be particularly important to our members who are concerned about the risks if a company discloses no expert. They fear a future problem occurring before a financial expert has been added to the board may increase stockholder litigation or legal liability. Even without a future problem, it may cause institutional investors to vote against director slates of companies without financial experts.

We suggest that the Commission allow for a 24-month transition period to coincide with the transition periods being proposed by the New York Stock Exchange and NASDAQ in connection with their independence requirements. The NYSE and NASDAQ both recognize in allowing for a phase-in of independence standards that recruiting board appropriate board candidates requires significant time.

In conclusion, we strongly support strengthening the role of independent audit committees. However, we believe that requiring that an accountant join a company's audit committee would not further this goal. We believe that access to experts and education and training of audit committee members would be far more valuable.

We appreciate your consideration of these comments. We would be happy to discuss these comments or to provide any assistance, such as conducting a survey of our members.


Kathleen Gibson and
Lydia Beebe
On Behalf of the Enron Task Force of the
American Society of Corporate Secretaries