November 29, 2002
VIA Electronic Submission
Mr. Jonathan G. Katz
Re: Proposed Rules Defining Audit Committee
Dear Mr. Katz:
Teachers Insurance and Annuity Association-College Retirement Equities Fund ("TIAA-CREF")1 is pleased to submit comments on the Securities and Exchange Commission's proposed rules to implement Section 407 of the Sarbanes-Oxley Act, requiring disclosure in company annual reports of the number and names of those audit committee members deemed to be financial experts. While we fully support the goal of the Sarbanes-Oxley Act and the SEC to ensure that audit committees possess the appropriate level of expertise to carry out their important mandate, we are concerned that the definition of financial expert proposed by the SEC is unnecessarily restrictive.
The SEC's proposal defines financial expert as a person who, through education and experience as a public accountant or auditor or a principal financial officer, controller or principal accounting officer of an SEC reporting company, or, in the Board's judgment, through similar expertise and experience, possesses several specific attributes. The required attributes include: an understanding of financial statements and GAAP, experience with internal controls, an understanding of audit committee functions, and, significantly, experience applying GAAP and preparing or auditing financial statements that present accounting issues generally comparable to those raised by the issuer's financial statements. It is this last attribute that we find the most problematic and which could unduly restrict the pool of individuals who could qualify as financial experts, particularly in the case of investment companies.
The premise that individuals need to have personally prepared or audited financial statements of a public company or actually applied GAAP to have the financial experience and sophistication necessary to be deemed a financial expert on the audit committee seems extremely narrow. While hands-on accounting experience should be an important consideration in reviewing an individual's qualifications as an expert, it is just one factor that we believe should be considered in evaluating the totality of an individual's education, experience and financial acumen. The fact that an individual's financial skills and experience were not developed in a public company or a comparable company should not preclude the individual from having sufficient financial expertise, knowledge and sophistication to be deemed an audit committee's financial expert.
The narrow definition proposed by the SEC would disqualify some of the most qualified, financially literate people in the corporate and investment world. For example, currently serving on the TIAA and CREF audit committees are the vice president and chief investment officer of a major foundation, the vice chairman of a U.S. bank, two principals of money management firms and two accomplished professors of finance. Each of these persons has proven to be a valuable resource to our audit committees. Yet arguably they may not qualify as financial experts under the restrictive SEC definition since they may not have had experience preparing or auditing financial statements for a company with financial statements or accounting issues comparable to TIAA or CREF. Our situation may be more complex than others since we have companies which report on the basis of GAAP and those which report on the basis of SAAP. In order to deal with this complexity, our audit committee members need to have a broad range of financial expertise. With the impressive group of financial talent that we have serving on our audit committees, it makes no sense that we, or others like us, should be faced with the dilemma of either disclosing that we have no financial expert serving on our audit committees, or otherwise be forced to incur the time and expense of finding new board members with such expertise. In our specific situation, finding such an expert could be very difficult.
We strongly recommend that the SEC revise its definition of financial expert so that the specific attribute of experience applying GAAP and preparing or auditing financial statements of comparable companies would not be a requirement, but rather one element that could be considered in the board's determination of whether someone has the requisite expertise, financial sophistication and intelligence to serve as a financial expert. We believe that this approach would be fully consistent with the broad mandate provided by Section 407 of the Sarbanes-Oxley Act to the SEC to define those elements of financial expertise that are relevant in determining whether an audit committee member is qualified as a financial expert.
If the SEC ultimately determines to adopt the definition as proposed, we recommend that there be a transition period of at least a year following adoption of the final rules to allow issuers to identify and recruit qualified members for their audit committees.
We would welcome the opportunity to discuss our thoughts on this initiative with the SEC staff.
cc: The Honorable Harvey L. Pitt