January 13, 2003
Mr. Jonathan G. Katz
Re: Release No. 33-8154, Strengthening the Commission's Requirements
Dear Mr. Katz:
Thank you for allowing Pfizer the opportunity to respond to the proposed rules, as required to be promulgated by the Sarbanes-Oxley Act of 2002.
Pfizer is a research-based global pharmaceutical company that discovers, develops, manufactures, and markets innovative medicines for humans and animals. For 2001, total revenues and assets exceeded $32 billion and $39 billion, respectively.
Pfizer recognizes the need of the U.S. Securities and Exchange Commission (SEC or Commission), and as now required under the Sarbanes-Oxley Act of 2002, to improve investor understanding and confidence in a company's financial reporting. Investors' confidence in independent auditors that companies utilize to opine on audited financial statements has surely been impacted by a number of recent accounting and disclosure scandals, and we commend the Commission for its efforts to propose meaningful solutions.
In general, we agree with the SEC's proposed rules addressing Auditor Independence. While in some instances the Commission has gone beyond the requirements of the Sarbanes-Oxley Act (the Act), we believe that some of these extensions have purpose and provide clarity. Yet there are other extensions that have introduced unintended consequences, i.e. confusion is generated, or more serious risks are introduced. We recognize the urgency with which these proposals must be finalized to respond to the congressional directives intended to restore confidence in the financial markets and investor community. Accordingly, we are limiting our comments to those areas where we feel strongly that the Commission should either provide clarity or consider the latent risks introduced before finalizing rules.
It is well understood that the Act coupled with the SEC's response are watershed events. We believe that a thoughtful gauging of transition periods for both Issuers and the Accounting profession will help to insure success. If the final rules appear unenforceable, audit committees may lose confidence in the registrants they oversee and the auditors on whom they rely for independent counsel. In that case, our chance for strengthening our governance environment achieves the opposite.
The proposed rules have generated confusion around whether tax services are prohibited non-audit services. Audit Committees would have to apply three principles against each tax initiative and understand in detail how the auditor's judgment intersects with the tax staff's efforts before approving work on the initiative. We feel this dynamic is too constrictive in a complex global environment and unintended by the Act. While the proposed rule acknowledges the congressional discussion that sought to permit tax services, the rule confuses that point by suggesting that there are circumstances when it isn't appropriate. We believe the historical approach to securing audit and tax services from the external auditor to be efficient and risk-sensitive. There are very few firms in the world that could deliver a quality tax service on the scale that large multinationals need. Engaging multiple firms would reduce efficiency and challenge the notion of confidentiality as an increasing number of third parties would have access to proprietary information, particularly if `rotation' is considered. Alternatively, the traditional approach of sourcing audit and tax services from one firm enhances the auditor's understanding and judgment of risks inherent in various tax positions.
We feel there are enough other mechanisms available to the Audit Committee to ensure that independence is sustained, e.g. pre-approval requirement, as well as their ability to secure outside counsel at any time. We recommend that the language in the proposed rules be clarified to specifically allow the provision of tax services as documented in congressional discussions and as acknowledged in some sections of the proposed rules.
The proposed rules go beyond what was required by the Act. All partners, including those assigned to international subsidiaries and tax services, must rotate after 5 consecutive years. This would bring significant disruption as well as the possibility of increased errors to audits of large, complex multinational companies at a time when the accounting industry is trying to right itself and re-establish credibility in the quality of their audits. As a multinational in a highly regulated industry, we are particularly concerned with these risks in countries where staffing levels may not be as robust as the US. In those countries, it may be difficult to staff engagements with partners that have good US GAAP and specialized-industry knowledge. We support rotation of the lead audit partner.
This provision warrants particular attention when deciding transition provisions given that the accounting industry is going through considerable restructuring and change following the dissolution of Arthur Andersen and the passage of the Act. We understand the GAO is studying the impact of rotation, and we suggest that the proposed rules not exceed what was required by the Act until the GAO completes its study.
The proposed rules require Audit Committees to pre-approve audit and non-audit services. We agree with this requirement and feel it will sustain a dialogue between the audit committee and auditors regarding the nature of the work being performed in `real time'. However, there are a couple of elements of the rule that should be reconsidered. The Audit Committee is responsible to the Board for ensuring they establish appropriate approval procedures. We do not believe that investors are better served by disclosing these procedures as required by the proposed rules. This is only one audit committee activity and to begin disclosing specific procedures of any board committee may erroneously attach higher significance to one activity over another. We also disagree with the proposed requirement to disclose the percentages of the categories of fees that were `pre-approved'. The commission's reasoning is that such a disclosure "would provide insight into the extent to which the audit committee takes an active, direct role in considering each category of non-audit fee...." We support the pre-approval concept; however, it must be a practical approach that ensures audit committees aren't encumbered in mechanical details vs. application of their judgments to meaningful company issues. Pre-approval, when correctly performed, has little to do with taking an active, direct role in the consideration of fees. For many companies there are recurring types of qualified services that an independent auditor performs. Some examples include statutory audits required in various countries, foreign government-mandated certifications to be done yearly by auditors or benefit plan audits. The audit committee of a company can review these types of recurring services, understand whether there are any changes in scope and pre-approve such services. We believe that they have still taken an active, direct role and that investors would be misled by separating pre-approved from other fees.
We share the same goal as the SEC - - that of maintaining and strengthening the integrity, quality and transparency of financial statements - - even as we challenge some of the details in the SEC's proposal.
We appreciate your consideration of these comments. We would be happy to discuss these matters further or to meet with you if it would be helpful.
David L. Shedlarz
Alan G. Levin