November 26, 2002
Jonathan G. Katz, Secretary
Re: File No. S7-40-02, Disclosure of audit committee financial expert as required by Section 407 of the Sarbanes-Oxley Act of 2002
Dear Mr. Katz:
Thank you for the opportunity to comment on the Securities and Exchange Commissions ("SEC" or "Commission") proposed rule implementing new disclosures required by the Sarbanes-Oxley Act of 2002.
Advancing the business of technology, AeA is the nations largest high-tech trade association, representing more than 3,000 member companies that span the high-technology spectrum, from software, semiconductors and computers to Internet technology, advanced electronics and telecommunications systems and services. AeAs membership is comprised of many smaller public companies, and it is primarily on their behalf that AeA submits this comment.
Specifically, AeA is concerned about the Commission's proposed requirement that a "financial expert" have direct experience preparing or auditing financial statements of reporting companies. As proposed, this definition is drawn more narrowly than necessary to accomplish the results Congress sought to achieve in the Sarbanes-Oxley Act of 2002. Further, if such a rule is adopted, AeA believes it will present a significant hardship on smaller public companies. Perhaps that is why the Commission also invited comment on whether "experience reviewing or analyzing" financial statements should suffice for qualification as a financial expert. AeA believes it should.
By requiring the financial expert to possess direct experience preparing audit or financial statements, the SEC assumes that only individuals with an audit background can provide the level of oversight that is necessary. Rather, individuals who understand the environment in which the issuer conducts business, and the competitive risks that it faces are in a much better position to raise questions about whether the financial statements fairly and accurately reflect that business and environment than one who simply understands Generally Accepted Accounting Principles.
The proposed rule would not serve to improve investor confidence in the functioning of an audit committee. A more productive approach would be to require that a financial expert possess the skills necessary to constructively challenge the external auditor and management team. Such skills would include the ability to review and comprehensively understand and challenge the conclusions set forth in the financial statements; the ability to understand the risk environment in which the issuer operates; a thorough understanding of the nature of the issuers business and an understanding of its business operations; an understanding of the securities law requirements for public issuers and particularly for issuers in a similar business or industry sector; and a thorough understanding of public issuer financial statements through experience analyzing and reviewing financial statements.
In contrast, putting the emphasis on an audit committee member's actual experience preparing or auditing financial statements neither guarantees that the individual has the capacity and experience to intellectually challenge the audit results, nor assures that the underlying financial statements are fairly or accurately prepared and presented.
There are more than 13,000 public companies in the United States today, and it is hard to imagine that there is the requisite number of qualified individuals to serve on those audit committees. If finalized as proposed, it would be very easy to imagine the difficulty many AeA member companies would face in trying to identify competent individuals with hands-on auditing experience to serve on their audit committee. In such a scenario, the best interests of the investing public would not be served.
In conclusion, AeA requests the Commission to broaden its definition of a "financial expert" to include individuals with experience in reviewing or analyzing financial statements.