May 8, 2003
Mr. Jonathan G. Katz, Secretary
File No. SR-NYSE-2002-33
Dear Mr. Katz:
KPMG is pleased to submit its comments on the New York Stock Exchange, Inc's (NYSE) proposed rule, Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc. Relating to Corporate Governance (the "Proposed Rule"), that amends its Listed Company Manual to implement changes in corporate governance, including changes to comply with the requirements of the Securities and Exchange Commission's (Commission) final rule, Standards Relating to Listed Company Audit Committees. We believe that effective audit committees play a critical role in the oversight of the financial reporting process that is fundamental to preserving the integrity of our capital markets.
While we are supportive of the proposed rule generally, we do not concur with the statement in the general commentary to section 303A(7)(d) that states, "While the fundamental responsibility for the company's financial statements and disclosures rests with management and the independent auditor, the audit committee must ..." Financial statements are representations and the responsibility of management. The independent auditor's responsibility is to express an opinion on the financial statements. Indeed, were the financial statements to be the representation and responsibility of the auditor, the auditor would lack the independence required to perform an independent audit of them. We believe the final rule should be modified to eliminate the reference to the independent auditor in this sentence.
On July 19, 2002, we provided the NYSE with our response to the New York Stock Exchange Corporate Accountability and Listing Standards Committee's June 6, 2002 Report (NYSE Report). Corporate governance has subsequently been impacted by the passage of the Sarbanes-Oxley Act of 2002 and the Commission's resulting rulemaking, including it's final rule, Standards Relating to Listed Company Audit Committee. We believe that the comments raised in our response letter to the NYSE Report continue to have relevance, including (i) defining independence requirements based on a broad conceptual framework rather than detailed rules and (ii) addressing stock-based compensation as a corporate governance issue. Our July 19, 2002 letter is attached.
We would be pleased to respond to any questions our comments raise. If you have comments or questions please contact Teresa Iannaconi at 212-909-5426 or Michael Conway at 212-909-5555.
July 19, 2002
Dear Mr. Cochrane:
We want to express our appreciation to the Exchange and the New York Stock Exchange Corporate Accountability and Listing Standards Committee (the Committee) whose initiatives and efforts have provided us with the opportunity to comment on the recommendations contained in the Committee's June 6, 2002 Report. Identification and implementation of reforms needed to restore the shaken confidence of investors are critically important at this time and we applaud the efforts of those individuals and organizations that have joined the auditing profession and others to take on the work necessary to that end.
While we are supportive of the recommendations generally, our comments on the Committee's recommendations are limited to those in which we believe we have specific perspectives as auditors. Our comments generally do not address recommendations that primarily involve legal or regulatory perspective or non-auditing related governance matters.
Requirements for "Independence."
The Committee's recommendations encompass enhanced requirements for independent directors including independent audit, nominating, corporate governance, and compensation committee members. We would like to comment broadly on the concept of "independence." As auditors we are required to be "independent" from our audit clients. The need for independence of various overseers of public companies was a concern of Congress in its debates concerning the adoption of the securities laws in the 1930's. We have previously submitted papers to the SEC and other public forums that advocate the establishment of a conceptual framework that broadly defines "independence." Your recommendations address "independence" in terms of business relationships, family relationships and the need for a five-year cooling off period after certain relationships.
We have advocated a broad conceptual definition of audit independence such as the following:
Audit independence is an absence of self-interests that create an unacceptable risk of material bias with respect to audit decisions.
We believe this conceptual definition is adaptable for board and committee members also. We believe that independence, whether applied to auditors or to board and committee members, should be thus defined broadly and left to appropriate application in individual circumstances rather than being labored over based on a plethora of narrowly defined relationships. We would be supportive of listing requirements that define independence requirements based on a broad conceptual framework rather than an inevitably expanding list of defined relationships. The underlying principle or concept must be capable of articulation in a simple manner if there is an expectation of compliance without a myriad of detailed rules.
Recommendation No. 5 - Require listed companies to have a compensation committee composed entirely of independent directors.
This recommendation includes requirements regarding the compensation committee's responsibilities to review and approve corporate goals and objectives relevant to CEO compensation, evaluate the CEO's performance in light of those goals and objectives, and set the CEO's compensation level based on this evaluation.
We do not express a view with respect to whether a compensation committee should be required or what the characteristics or duties of such a committee should be, but we do strongly endorse the need for clarity with respect to appropriate board level directives concerning executive compensation.
We support this recommendation and in particular support more detailed and specific documentation of the committee's intentions with respect to all senior level compensation. Some of the recent corporate failures have been accompanied by public concern over what have been characterized as excessive executive compensation. In auditing compensation costs, an auditor is better able to judge whether the compensation costs are appropriate when there are clear and specific board or compensation committee directives. In the absence of specific guidance as to the compensation and benefits that are intended to be awarded to executives and the circumstances in which compensation is to be transferred, generally accepted accounting principles do not provide for any special disclosure or accounting. Clearer articulation and documentation of intended senior executive compensation will facilitate more transparent accounting and disclosure of such arrangements.
We have previously corresponded with and testified before the Financial Accounting Standards Board (FASB) in connection with its deliberations about share based compensation. In a comment letter to the FASB dated December 28, 1993 and in a subsequent public hearing, we asserted our position that stock compensation is a significant corporate governance issue. We continue to believe that executive compensation, including stock based compensation, must be addressed by the board and strongly endorse the recommendation that executive compensation should be the subject of oversight by the board.
Recommendation No. 7 - Increase the authority and responsibilities of the audit committee, including granting it the sole authority to hire and fire independent auditors, and to approve any significant non-audit relationship with the independent auditors.
We strongly support this recommendation for expanded audit committee function since we believe that a strong functioning audit committee enhances the effectiveness of the independent auditor. The following comments address specific items within this recommendation.
A commitment to improved corporate governance and oversight of all aspects of the capital formation and trading markets is critical to restoration of confidence in the U.S. capital markets. We anticipate that, with some modification to the Committee's recommendations, significant benefits will be derived from their adoption and implementation.
We would be happy to provide any further comments or information that will advance your program. If you have comments or questions please contact Teresa Iannaconi at 212-909-5426 or Michael Conway at 212-909-5555.