November 25, 2002
VIA E-MAIL - firstname.lastname@example.org
Securities and Exchange Commission
Re: File No. S7-40-02; Proposing Release Nos. 33-8138, 34-46701
Dear Mr. Katz:
AmSouth Bancorporation ("AmSouth") appreciates the opportunity to submit this comment letter on the above-referenced proposals as they relate to the implementation of Section 407 of the Sarbanes-Oxley Act of 2002. AmSouth is a financial services company that was organized in 1970 and operates approximately 600 full-service banking branches in Alabama, Florida, Tennessee, Mississippi, Louisiana and Georgia through its wholly-owned subsidiary, AmSouth Bank. AmSouth has total consolidated assets of over $39 billion, and is among the 25 largest bank holding companies in the United States in terms of assets. The common stock of AmSouth is listed on the New York Stock Exchange.
Summary of Rule Proposal Regarding "Financial Experts"
Section 407 of the Sarbanes-Oxley Act requires the Securities and Exchange Commission (the "Commission") to issue rules requiring disclosure as to whether a public company's audit committee is comprised of at least one "financial expert," and, if not, why not. In the proposing release (the "Release"), the Commission seeks to implement Section 407 of the Sarbanes-Oxley Act by proposing that a "financial expert" have, through education and experience as a public accountant or auditor, or a principal financial officer, controller or principal accounting officer of a public company or experience in one or more positions that involve the performance of similar functions, the following attributes:
The disclosure required by proposed Item 309 of Regulation S-K indicates that the company's board of directors is the appropriate body to make the determination as to whether a person meets the definition of "financial expert."
In the Release, comments were requested on whether a "financial expert" should be required to have direct experience preparing or auditing financial statements of reporting companies or whether experience reviewing or analyzing such financial statements should suffice. The Release also solicits comments on whether a "financial expert" must possess all five of the attributes listed in the proposed definition and whether the Commission should broaden the scope of individuals who may qualify as an expert. The Release further requests comments on whether the definition should be modified. This letter addresses the Commission's requests for comments on these matters.
AmSouth's Position: Definition of "Financial Expert" Should be Broadened
AmSouth wholeheartedly supports the objective of Section 407 of the Sarbanes-Oxley Act, which is to ensure adequate disclosure as to the status of members of the audit committee as "financial experts" so that the investing public may evaluate this information. We believe, however, that the proposed definition of "financial expert" is drawn too narrowly to accomplish the purpose that Congress sought to achieve in the Sarbanes-Oxley Act and, if adopted as proposed, will leave a large number of public companies without a "financial expert" on their audit committees.
Section 407 of the Sarbanes-Oxley Act directs the Commission "to consider" whether a person, through education and experience in one of several enumerated positions, possesses five attributes, in order to qualify as a "financial expert." Notably, the statute does not instruct the Commission to require that a "financial expert" actually possess each of the five attributes or have previously served in one of the listed positions. Nor does the statutory language prohibit the Commission from defining "financial expert" in such a way as to permit a board of directors to weight the five attributes in reaching a determination as to one's status as a "financial expert." The Commission is granted latitude under the statute both to frame the definition of "financial expert" and to defer to boards of directors in evaluating the degree of importance to which they assign each attribute. Accordingly, recognizing the narrowness of the proposed definition, the Commission invited comment.
We recommend to the Commission that the scope of the definition of "financial expert" be expanded in three respects. First, we propose that the definition of "financial expert" be revised so that it clearly encompasses directors that have experience reviewing and analyzing financial statements, rather than be restricted solely to those directors that have direct experience preparing or auditing financial statements. Second, we suggest expanding the universe of persons who qualify as "financial experts" by removing the requirement in the proposed definition that the person (i) have experience in a position with a public company and (ii) have experience applying GAAP to financial statements of a company that is in the same or similar industry as the registrant. Third, we recommend expanding the definition of "financial expert" to include within the meaning of "performance of similar functions" those directors who have previously supervised people who have served in one of the enumerated positions.
Unless changed by the SEC, the proposed definition leaves little room for a board of directors to determine that a director qualifies as a "financial expert" unless the person was a public accountant or a CFO or senior accounting officer of a public company and has prepared or audited financial statements of such a public company that is in the same industry.
1. Experience "Reviewing and Analyzing" Financial Statements Should Be Sufficient to Qualify a Director as a "Financial Expert"
Among the five attributes that the proposed definition of "financial expert" would require a director to possess is "experience preparing or auditing financial statements that present accounting issues that are generally comparable to those raised by the registrant's financial statements." We disagree that one must have actually prepared or audited financial statements in order to monitor effectively and properly the performance of the independent auditors and the internal accountants.
By requiring that a "financial expert" have experience auditing or preparing financial statements, the proposed definition seems to describe an accounting expert or accounting practitioner rather than a person one would normally characterize as a financial expert, someone who may have broad management and financial experience. We believe that it is unnecessary that members of the audit committee should function or have experience as auditors or accounting experts. As the Blue Ribbon Committee on Improving Effectiveness of Corporate Audit Committees cautioned, an audit committee "is neither intended nor equipped to guarantee with certainty to the full board and shareholders the accuracy and quality of a company's financial statements and accounting practices," and that financial reporting, accounting and audit functions should instead be "conducted by full-time professionals dedicated to these purposes." Rather, members of the audit committee should have the background and experience necessary to monitor the performance of those responsible for the actual preparation of the financial statements of the registrant.
A director's business experience and financial literacy (i.e., an understanding of financial statements and GAAP) should be of primary importance when a board evaluates whether a person can perform this supervisory function. Therefore, it should be equally relevant to a board's analysis whether the person's financial literacy was gained through experience reviewing and analyzing financial statements or through experience preparing or auditing financial statements. In fact, we feel it is more important that audit committee members understand the meaning and importance of the financial information presented to them than that they be able to prepare audited statements themselves. Experience auditing or preparing financial statements does not necessarily equate to expertise in financial decisions, controls or analysis necessary to a company's financial reporting functions.
The Commission recognizes in the Release that a key requirement of qualifying as a "financial expert" is the ability to perform this monitoring function. Indeed, the Commission included the following factor in the list of qualifications that the board of directors should consider in determining whether a director is a "financial expert":
We believe that sufficient experience reviewing and analyzing financial statements, accompanied by the possession of the other attributes, will enable a director to make such knowledgeable and thorough inquiries. As the Commission states in the Release, the board should consider "the level and amount of the person's direct experience reviewing, preparing, auditing or analyzing financial statements."
Accordingly, we recommend revising the definition of "financial expert" to include within the definition those directors who have experience reviewing and analyzing financial statements.
2. Requiring Experience in a Position with a Public Company in the Same Industry as the Registrant is Unnecessarily Restrictive
The definition of "financial expert" in proposed Item 309 of Regulation S-K further requires that a person (i) have served in a position with a company that was required to file reports pursuant to Section 13(a) or 15(d) of the Exchange Act and (ii) have experience preparing or auditing financial statements that present accounting issues that are "generally comparable" to those raised by the registrant's financial statements. We are concerned with the first provision because it states that a person must have experience serving in one of the enumerated positions with a public company. We are also concerned with the proposition set forth in the second provision, which could be interpreted by some to mean that such person's experience must have been obtained in a company in the same industry as that of the registrant.
The Commission's proposed requirements that a "financial expert" have served with a public company and in the same industry as the registrant deviates from the statute and would unnecessarily reduce the already limited pool of candidates who might otherwise satisfy the definition. Particularly with respect to banking and financial services institutions, a board of directors should not be forced to discount a candidate's relevant experience with a privately-held company. Experience with the estimates, accruals and reserves applicable to privately-held institutions would be valuable in a publicly-held institution, as many of those accounting issues are the same. A person with substantial experience applying GAAP at a non-reporting financial institution might well be equally as qualified as his or her public company counterpart. A board of directors should not be precluded from weighing such experience in making its determination.
Furthermore, while a board of directors should consider and give weight to the extent to which a person's experience with GAAP and financial statements was acquired in an industry that presents similar accounting issues, a rule that would require such person's experience to have been obtained in the same or a similar industry is overly restrictive. Limiting candidates to those persons with experience in the same or similar industry would work a substantial hardship on many companies as they attempt to select persons who satisfy the "financial expert" definition. Experience reviewing financial statements with a company in another industry can still provide the person with adequate knowledge of and familiarity with the accounting issues facing the registrant's industry, as many such issues are not mutually exclusive. Therefore, we propose that the Commission either remove the words "generally comparable" from the proposed definition or make it clear in the adopting release that a person's experience need not have been in the same or a similar industry. Again, we would also prefer that the Commission acknowledge that a board of directors has discretion to assign a weight to each of the attributes as the individual circumstances warrant.
3. The Supervision of Persons Who Have Served in One of the Specified Positions Should Be Sufficient to Qualify a Director as a "Financial Expert"
The currently proposed definition provides that a director is eligible to qualify as a "financial expert" so long as the person has experience as:
The proposed definition also provides that a director without experience in one of these positions may still be eligible to qualify as a "financial expert" through "experience in one or more positions that involve the performance of similar functions" as a person in one of the enumerated positions.
We believe that the proposed definition of "financial expert" should be expanded to include directors who have previously supervised persons who have served in one of the enumerated positions. This approach would qualify many CEOs and COOs who have not themselves served in one of these positions, but nonetheless have been responsible for the oversight of persons serving in such a position. If the director possesses the attributes necessary to monitor the outside accountants and internal auditors, it should not be necessary that a "financial expert" have served in one of the enumerated (or similar) positions. Therefore, we propose that the Commission recognize in its final rule that "performance" is subsumed in "supervision" of people who performed the enumerated functions.
We believe that the proposed definition of "financial expert" unnecessarily excludes certain directors who otherwise would effectively fulfill the monitoring function incumbent upon members of the audit committee. In particular, the definition will make it difficult for the board of directors to determine that a director qualifies as a "financial expert" unless the person was a public accountant or a CFO or senior accounting officer of a public company and has experience preparing or auditing financial statements of a public company in the same industry as his or her company. This proposed definition unnecessarily limits the universe of persons who might be effective members of an audit committee and who should qualify as "financial experts." We are also concerned about the negative perceptions of investors resulting from disclosures that only one, or for many companies, none, of the directors on the audit committee can be deemed a "financial expert" under the Commission's definition.
We appreciate the opportunity to submit comments. I am available to meet with the Commission or the Staff and to respond to any questions.
cc: C. Dowd Ritter