Office of the Chief Accountant:
Commissione Nazionale
per le Societa e la Borsa -
Auditor Independence No Action Request

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

OFFICE OF THE CHIEF ACCOUNTANT

August 24, 2000

Mr. Antonio Rosati
Director of Issuers Division
Commissione Nazionale per le Societa e la Borsa
Via Isonzo 19/D
00198 Roma, Italy

Dear Mr. Rosati:

Attached is a copy of the report (the "model report") that auditors of an Italian company's financial statements would be required to issue to that Italian audit client when certain transactions occur. You have asked the staff of the United States Securities & Exchange Commission (the "staff") to advise you whether performing the procedures described and issuing such a report would create an independence problem for Italian companies that register their securities in the United States ("Italian registrants"). We have considered the effect on an auditor's independence under the U.S. requirements of an auditor's performance of the procedures and issuance of the model report.

In the United States, as noted in Rule 2-01 (c) of Regulation S-X promulgated by the SEC, to analyze an independence issue, the Commission will consider all relevant circumstances and relationships, which of course, include the provision of consulting or other professional services to the client. When looking at consulting services, the staff has found that a mutuality of interest may exist, which impairs the auditor's independence, when the service results in, among other things:

1. the auditor auditing his/her own work,

2. the auditor supplanting management's role in making corporate decisions, or

3. the auditor being perceived as an employee or management of the audit client.

For these reasons, a 1994 Staff Report on Auditor Independence notes that the Commission's staff questions the independence of auditors that issue fairness opinions or valuation reports.

Based on our discussions with you and our review of the model report, the SEC staff would not object if an auditor that performs procedures limited to those described in the report and issues the model report concludes that they are independent provided that the auditor also represented in writing that "the report does not express an opinion on the fairness of the transaction, the value of the security, or the adequacy of consideration to shareholders." The staff would also not object if the following additional representation is added, "and therefore the issuance of the report would not impair the auditor's independence under the U.S. independence requirements;" If the report relates to a transaction that is being registered with the SEC, this written representation, along with the report and the auditor's consent to include the report, also must be included in the registration statement.

We appreciate your efforts in this matter and look forward to a successful implementation of the proposed resolution. If you have any questions regarding this matter, please contact Scott Bayless at (202) 942-4412.

Sincerely,

Lynn Turner
Chief Accountant

(Attachment)

III	MODEL REPORT (to be adapted depending on circumstances including cases involving "quotas")
	A	-	Title:	AUDITING FIRM'S REPORT RELATING TO THE RATIO FOR THE EXCHANGE OF SHARES PURSUANT TO ART. 2501 (quinquies) OF THE ITALIAN CIVIL CODE. (This model refers to the situation where two audit firms have been appointed and each prepares a separate report. The model has been divided into paragraphs to make references easier to make and understand).
	B	-	Addressee:	The stockholders of Company A.
	C	-	Objective, subject and scope of the engagement:
			C - 1)	We have been appointed by (name of body/company which has made appointment) of Company A, to prepare our report on the ratio for the exchange of shares of company A and of company B, in accordance with Article 2501 (quinquies) of the Italian Civil Code. To this end the Board of Directors of Company A has provided us with the proposed merger project together with a Report prepared by the Board which identifies, explains and justifies the exchange ratio in terms of Article 2501 (quater) of the Italian Civil Code, and the Balance Sheet situation as of ... 199Y as prepared in accordance with Article 2501 (ter) of the Italian Civil Code.
			C - 2)	The proposed merger project will be subject to approval at an Extraordinary General Meeting of the shareholders of Company A to be held on [date] or on [date] and [date], if required. In the same way, the shareholders of Company B also will be required to approve the project at an Extraordinary General Meeting to be held on [date] or on [date] and [date] if required.
			C - 3)	The audit firm Y has been appointed to prepare a similar report for Company B.
			C - 4)	Purpose and Scope of this report The purpose of this report is to provide the shareholders with information regarding the application of the valuation methods adopted by the Directors in determining the ratio for the exchange of shares as part of the merger process and whether, under the circumstances, such methods are reasonable and not arbitrary. We have not performed a valuation of the Company. This was done by the Directors and the Professional Advisors appointed by them. To this end, in carrying out our engagement, we have examined the valuation criteria adopted by the Board of Directors and the Professional Advisors in determining the ratio for the exchange of shares.
	D	-	Documentation utilized
			D - a)	In performing our work, we obtained directly from Company A and from the auditors of Company B, the two companies involved in the merger, such documentation and information as was considered useful in the circumstances. We analyzed such documentation as was made available to us for this purpose and, in particular:
				1)	The proposed merger project and the reports of the Boards of Directors of the two companies addressed to the respective Extraordinary General Meetings which, on the basis of the Balance Sheet situation as at 199Y, propose a ratio for the exchange of shares as follows: (Insert details of share exchange arrangement) This ratio for the exchange of shares has been determined by the directors using the factors provided in the valuation report as described at point (2) below.
				2)	The valuation reports as prepared by ... (hereafter "the Professional Advisors"); these reports, dated ... and prepared at the request of the two companies involved in the merger, set out in detail the valuation criteria adopted, why they were chosen and the amounts resulting from their being used; and the considerations of the Boards of Directors on deciding upon the ratio for the exchange of shares.
				3)	The following documentation was used by the "Professional Advisors" to prepare their valuation reports and, subsequently, within the scope of our engagement, examined by our audit firm:
					-	The statutory financial statements of Company A and Company B as at 31 December 199X (the year end date prior to the date of the merger balance sheet) accompanied by the Report of the Board of Directors, the Report of the Board of Statutory Auditors and the External Auditors' Report. In particular, we have prepared the audit report in respect of the financial statements of Company A, while audit firm Y has prepared the audit report on the financial statements of Company B.
					-	Budgets for the year ending 199Y and the succeeding three-year forecasts prepared by the two companies involved in the merger;
						1)	Cash flow forecasts for the two companies for the year ending 199Y prepared by the two companies involved in the merger;
						2)	An appraisal of the current value of the; real estate and other tangible fixed assets of Company A and Company B, prepared by independent experts other than independent auditors;
						3)	Information prepared by "Professional Advisors" on companies operating in the same sector on an international level;
						4)	The Stock market performance of the stock of Company A and of Company B in the period....
						5)	The balance sheets prepared in accordance with art. 2501 of the Italian Civil Code (or the financial statement of the previous financial period if they related to a period ended not more than six months prior to the date of publication of the merger project).
			D - b)	We also have examined additional documentation as follows: (Provide list of such documentation) 1) ......... 2) ......... 3) Accounting and statistical information and any other information considered relevant to the purposes of this report.
			D - c)	We also have obtained representations that, as far as the Directors of the Company are aware, there have been no significant changes to the figures and information that we considered during our analysis.
	E	-	Valuation methods adopted by the Boards of Directors and "Professional Advisors"
			-	As explained in their reports the Board of Directors and "Professional Advisors", considering the importance and complexity of the merger operation, considered it appropriate to identify individual valuation methods which; as well as being "in accordance with current best practice, enable the two companies to be valued on a consistent basis.
			-	(Provide a sufficiently detailed and comprehensible description of the valuation methods used in determining the ratio of the exchange of shares and the reasons of the Board of Directors and Professional Advisors why those methods were chosen).
	F	-	Valuation problems encountered by the Boards of Directors and "Professional Advisors" (Description of the main difficulties that they could have encountered).
	G	-	Result of the valuation performed by the Boards of Directors and "Professional Advisors" (Provide details of the amounts and the ratios for the exchange of shares resulting from the application of the methods adopted (relative information} and the importance given by the Board of Directors to each of the various methods (relative importance) in arriving at the ratio for the exchange of shares set by the Boards of Directors. Include the value of the companies resulting from these methods, the range of values and the proposals of the "Professional Advisors).
	H	-	Work done
			H - A	Work done on the "documentation utilized" as mentioned at point D - 3):
				H - Al.	As already stated, we have performed a full audit of the statutory financial statements of Company A at 31 December 199Y. Meanwhile, the financial statements of Company B, at the same date, have been audited by audit firm Y;
				H - A2.	(Describe the work done on the financial statements used as a reference point for the valuation methods. Normally, this will consist of a full audit or a limited review1, with or without limited audit procedures) Considering the valuation methods applied by the Boards of Directors and the "Professional Advisors", we have performed a limited review of the balance sheet of Company A at......... This involved holding discussions with the management of the company to identify the accounting principles used and most important accounting issues involved in preparing the Balance Sheet. We performed an analytical review of the amounts contained in the Balance Sheet and of the accounting ratios arising, comparing these figures with those resulting from the financial statements at 199Y, which were audited in full. (If audit procedures have been carried out, add the following paragraph: In addition, we applied limited audit procedures to the following balances: (specify balances tested)). We performed such procedures as were necessary to fulfill the objective of our engagement as indicated in paragraph C. We have met with company management to obtain information about events occurring since the Balance Sheet date that could have a significant effect on the figures being examined here.
				H - A3.	With regard to the 199Y budget, three-year plan and cash flow forecasts of Company A, while considering the inherent uncertainty and limits of any type of forecast, we have discussed the criteria used with the management of the company. We also performed the following procedures: [list];
				H - A4.	Audit firm Y has performed similar work on the Balance Sheet, the 199Y budget, the three-year plan and the cash flow forecasts of Company B. We have been provided with information about the work done and the results thereof. This information enabled us to verify that Company B applied criteria uniform with those applied by Company A in preparing its Balance Sheet, budget, three-year plan and cash flow forecast. This was done to determine whether the information concerning the two companies used by the "Professional Advisors" and the Board of Directors to apply the valuation methods described above was comparable.
				H - A5	We have examined the independent appraisals of the current value of the real estate and other tangible fixed assets of Company A with the aim of confirming the reasonableness of the criteria applied and the independence of the appraiser. A similar examination was carried out on the independent appraisals of the current value of the real estate and tangible assets of Company B by the auditing firm Y which has provided us with details of the work that they performed and the results obtained. This information enabled us to verify that criteria uniform with those applied by Company A have been used. This was done to determine whether the information concerning the two companies used by the "Professional Advisors" and the Board of Directors to apply the valuation methods described above was comparable. (Where such appraisals are required and have been prepared)
			H - B	Work done on the methods used to determine the ratio for the exchange of shares (adapt to specific circumstances). We also have performed the following procedures:
				-	verified the completeness and consistency of the Directors' processes in fixing the exchange of shares;
				-	performed a sensitivity analysis in relation to the valuation methods adopted; -checked whether the valuation methods were applied consistently;
				-	checked that the figures used are consistent with the sources of reference and with the "documentation utilized" as described in Point D above;
				-	checked the arithmetical accuracy of the calculations used for the determination of the ratio for the exchange of shares by applying the valuation criteria adopted by the Board of Directors and the Professional Advisors.
	I	-	Comments on the suitability of the methods used and the accuracy of the accounting estimates (provide comments on the appropriateness (suitability) of the methods used. Add a phrase like the one below) With reference to this engagement we wish to draw attention to the fact that the principal purpose of the decisional process used by the Boards of Directors and the "Professional Advisors" was to arrive at an estimate of relative values of the companies involved in the merger by applying uniform criteria for the purposes of the determination of the ratio for the exchange of shares. As a result, the resulting estimates are not intended for any other purpose.
	L	-	Specific limitations encountered by the auditors in carrying out the engagement. (Indicate specific limitations encountered by the auditor while carrying out the engagement as a result of particular circumstances identified).
	M	-	Conclusion Based on the documentation we have examined and the procedures described above, and considering the nature and extent of our work as described in this report, we believe that the valuation methods adopted by the Directors based upon the advice of their Professional Advisors are, under the circumstances, reasonable and not arbitrary and have been correctly applied by them in their determination of the ratio for the exchange of shares contained in the proposed merger project.
Place and date (Auditors' signature)
Footnote 1 Such a review may be unnecessary where the valuation methods used by the Board of Directors and the Professional Advisors are not based upon the financial statements.

http://www.sec.gov/info/accountants/noaction/italyaud.htm