American Federation of Labor and Congress of Industrial OrganizationsJanuary 21, 2003 BY ELECTRONIC MAIL AND COURIER Jonathan G. Katz, Secretary
Re: File No. S7-49-02 Dear Mr. Katz: I am writing to briefly supplement and clarify the January 13, 2003 comment letter submitted by Damon Silvers, on behalf of the American Federation of Labor and Congress of Industrial Organizations, on the Securities and Exchange Commission (the "Commission") proposal, S7-49-02, to strengthen the Commission's Requirements regarding auditor independence. A. Supplemental Comments Regarding Prohibited Non-Audit Services As stated in our January 13th letter, we believe that the proposed rules appropriately remove exceptions to existing prohibitions on non-audit services, such as bookkeeping, legal services, appraisal, human resource consulting, etc. I am concerned, however, that the many questions the Commission poses in the proposal suggest that the Commission may weaken the proposed rules by continuing to allow numerous exceptions to these prohibited services. I am especially troubled, for example, that in the section on human resources (Section B. 7), the Commission asks whether an auditor's independence is impaired if the auditor provides consultation with respect to the compensation arrangements of the company's executives. By advising the board on executive compensation, an auditor is in effect evaluating the performance of that executive, a role that could make an auditor reluctant to draw attention to possible shortcomings by that executive in the future. Alternatively, if the auditor advises the executive on his or her compensation, the auditor is acting as an advocate for the executive, a role that conflicts with the auditor's duty to shareholders. In either case, the auditor's independence is impaired. We oppose this and other exceptions to the prohibited services, and believe that any such exceptions would undermine the Commission's laudable efforts to strengthen its auditor independence rules. B. Clarification Regarding Audit Committee Involvement and Pre-Approval Policies I would like to clarify our position with respect to the proposed pre-approval policies and procedures. We strongly support the provisions in the proposed rule that require the audit committee to pre-approve all permissible non-audit services, but believe that approval must be granted for each particular non-audit engagement. This is essential to ensure that the audit committee is at all times aware of both the range of non-audit services provided by the company's auditor and the level of associated non-audit fees. We therefore oppose those provisions of the proposed rule that would allow an audit committee to establish pre-approval policies and procedures that would empower management to engage an auditor to perform non-audit services without the specific approval of that service by the audit committee. Moreover, we believe these provisions are inconsistent with the intent of the Sarbanes-Oxley Act. Once again we commend the Commission for formulating comprehensive rules to strengthen auditor independence and support their rapid adoption in a form at least as strong as those proposed. As stated previously, we believe that implementation of the proposed rules will go a long way toward restoring investor confidence in the quality and reliability of audited financial statements.
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