November 29, 2002
Re: Securities Act Release No. 33-8138
Securities and Exchange Commission
Ladies and Gentlemen:
This letter is submitted jointly by United Microelectronics Corporation ("UMC"), Siliconware Precision Industries Co., Ltd. ("SPIL") and AU Optronics Corp. ("AUO," together, the "Commenting Issuers"), all incorporated under the laws of the Republic of China, also referred to as Taiwan or the ROC, in response to the request for comments in release Nos. 33-8138 and 34-46701, dated October 22, 2002 (the "Proposed Rules"), by the Securities and Exchange Commission (the "Commission"), regarding the required qualifications and disclosures of financial experts serving on a reporting company's audit committee pursuant to Section 407 of the Sarbanes-Oxley Act of 2002 (the "Act").
We would like to thank the Commission for allowing us the opportunity to comment on the Proposed Rules. While we agree with Congress' and the Commission's view that accounting or financial expertise is important for an audit committee or a board of directors to have in order to properly discharge its responsibilities as enhanced by the Act, we are concerned that the definition of the "financial expert" as well as the scope of required disclosures, as proposed, would create such hardship for reporting companies under the U.S. Securities and Exchange Act of 1934, as amended (the "Exchange Act"), particularly the foreign private reporting companies under the Exchange Act, that they would do little to strengthen investor confidence in the market. Specifically, we would like to address the following:
I. There May Be Very Few People, if any, Qualified To Serve As a "Financial Expert," as Defined in the Proposed Rules, on the Commenting Issuers' Audit Committees or Boards.
A "financial expert," as defined by the Proposed Rules, in essence, has to have education and experience as either (a) a public accountant or auditor, (b) a principal financial officer, controller, or principal accounting officer, of a company that, at the time the person held such position, was a reporting company pursuant to the Exchange Act, or (c) an individual with experience in one or more positions that involve the performance of similar functions or that result in the individual having similar expertise and experience, in the judgment of the company's board of directors. Such a "financial expert" must have the following five attributes:
A. An understanding of financial statements and generally accepted accounting principles ("GAAP") used by the registrant in its primary financial statements.
The Commenting Issuers are required under local rules and practices to publish their financial statements pursuant to ROC GAAP. It is not difficult for a former public accountant or a principal financial or accounting officer in Taiwan to understand ROC GAAP. However, as proposed by the Commission in its Instructions to Item 15(b).4.k. of Form 20-F, in evaluating the education and experience of a candidate, the board of directors should consider the level of his or her experience with reconciliation of financial statements with U.S. GAAP. This factor is reasonable, as it would be useless for a financial expert of an Exchange Act reporting company to understand ROC GAAP only when all the financial statements submitted to the SEC are also required to be reconciled to U.S. GAAP. Unfortunately, this consideration would also narrow the pool of candidates ROC reporting companies can choose from, as there are only six Exchange Act reporting companies in Taiwan currently and only limited numbers of accountants and principal financial or accounting officers who have worked with, or at, these selected companies.
B. Experience applying such generally accepted accounting principles in connection with the accounting for estimates, accruals, and reserves that are generally comparable to the estimates, accruals and reserves, if any, used in the registrant's financial statements.
As previously discussed, there is a very limited number of individuals in Taiwan who have had experience with the reconciliation of estimates, accruals and reserves used in a registrant's financial statements to U.S. GAAP. In fact, the Instructions to Item 15(b).4. specifically contemplate that these candidates have such experiences in the context of an Exchange Act reporting company. Furthermore, as the proposed required experience with such estimates, accruals and reserves needs to be "generally comparable" to the estimates, accruals and reserves used in the registrant's financial statements, the candidate would have had to work in the same or related industry as the registrant. In a very small pool of candidates, finding a qualified financial expert, as defined, becomes increasingly difficult.
C. Experience preparing or auditing financial statements that present accounting issues that are generally comparable to those raised by the registrant's financial statements.
The certified public accountants with applicable U.S. GAAP experiences are mostly still practicing in one of the Big Four accounting firms, since all six of the Exchange Act reporting companies in Taiwan became publicly traded in the United States within the past six years. Given the independent nature of the auditors as well as members of an audit committee, members of an accounting firm cannot sit on the audit committee of an Exchange Act reporting company whom the firm audits. Furthermore, accounting firms have strict conflict of interest policies which would make it difficult for members of the firm to sit on the audit committees of other Exchange Act reporting companies while they are still representing the firms, even when they are not the companies' auditors. Furthermore, the Exchange Act reporting companies in Taiwan would be reluctant to invite onto its audit committee, as a "financial expert," the auditor of a competing company for confidentiality concerns. This is difficult to avoid given the fact that most of these large companies have one of the Big Four accounting firms as their auditors.
D. Experience with internal controls and procedures for financial reporting.
As the remaining pool of candidates consists of former or current auditors or certified public accountants, most of whom have not had experience serving as a controller or a principal financial or accounting officer of one of the six Exchange Act reporting companies in Taiwan, it is uncertain at this point, whether anyone still remains in the pool of qualified candidates.
E. An understanding of audit committee functions.
Given that certain prescribed duties of an audit committee in the United States are served by "Supervisors" which are positions statutorily created by the ROC Company Act, none of the Commenting Issuers, and almost no companies organized under the laws of ROC, has an audit committee. As a result, the functions of an audit committee would be foreign to any potential candidate.
II. The Requirements for the Disclosure of Names of Financial Experts As Well As Their Independence Will Pose Additional Burdens on the Already Impossibly Narrow Definition of a "Financial Expert."
Because most of the Exchange Act reporting companies in Taiwan are high tech manufacturing companies that constitute different parts of the similar production chains, most of these companies have substantial business relationships in one way or another, whether as investors, customers or suppliers. If there is absolutely no affiliation, then often times, they are competitors. As discussed above, given how small the securities market is in Taiwan and closely-linked the Exchange Act reporting companies are within their industries, the companies are particularly concerned with confidentiality issues and intellectual property protection concerns. It would be extremely difficult for any of these reporting companies to find an independent "financial expert" with all the required attributes, whom the company would be comfortable inviting onboard. Given the seeming impossibility of the task, to require that the names of any "financial experts" be disclosed would deter such potential qualified candidates from serving on our audit committees or boards. Even though the Commission seems to be willing to ensure that no enhanced liability be placed upon the financial experts, a formal designation that an audit committee member is a "financial expert" may prevent such member from successfully disclaiming expertise in areas of finance and accounting in a court of law.
We believe that Congress gave the Commission sound guidelines for the qualification of a financial expert in the Act, which were not necessarily meant to function as separate requirements. As proposed, the rules would be impossible to comply with by Exchange Act reporting companies in Taiwan, and possibly most Asian countries. That would certainly not be the intent of Congress. Nor would it be the intent of Congress to have these Asian companies delisted from NASDAQ, which has proposed to mandate the appointment of such financial experts for listed companies unless specific exemptions were granted.
If the Commission could promulgate the rules with more flexibility and allow the companies more discretion in applying these guidelines, the rules will serve more practical purposes in their protection of investor interests.