FOR IMMEDIATE RELEASE 99-14 NYSE CHAIR RICHARD GRASSO, NASD CHAIR FRANK ZARB, AND BLUE RIBBON PANEL CO-CHAIRS IRA MILLSTEIN AND JOHN WHITEHEAD ANNOUNCE "TEN POINT PLAN" TO IMPROVE OVERSIGHT OF FINANCIAL REPORTING PROCESS New York, NY, February 8, 1999 -- The New York Stock Exchange (NYSE), the National Association of Securities Dealers (NASD) and the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees today released its report announcing ten far-reaching recommendations to improve the quality of corporate financial reporting. The "blue ribbon" panel, drawing members from the business, financial and accounting communities, was established in September 1998 by the NYSE and the NASD to make recommendations on strengthening the role of audit committees in overseeing the corporate financial reporting process. It was created in response to concerns expressed by SEC Chairman Arthur Levitt about the adequacy of the oversight of the audit process by independent corporate directors. The panel is co-chaired by John C. Whitehead, former Deputy Secretary of State and retired Co- Chairman and Senior Partner of Goldman, Sachs & Co. and Ira M. Millstein, Senior Partner of Weil Gotshal & Manges LLP and a noted corporate governance expert. John C. Whitehead, Co-Chair of The Blue Ribbon Committee, said, "Our report is geared toward effecting pragmatic progressive changes in the functions and expectations of corporate boards, audit committees, and auditors regarding financial reporting and the oversight process. Quality financial accounting and reporting can only result from effective interrelationships among relevant corporate participants. We view our recommendations as an integrated set of objectives; a mosaic to enhance the financial reporting and oversight process." Ira M. Millstein, Committee Co-Chair said, "The job of an audit committee is clearly one of oversight and monitoring. Our Blue Ribbon panel's recommendations are built on two essentials: first, an audit committee with actual practices and overall performance that reflect the professionalism embodied by the full board of which it is a part, and second, a legal, regulatory, and self-regulatory framework that emphasizes disclosure and transparency and accountability. The recommendations address three major areas: first, audit committee membership requirements; next, audit committee structure and function including internal corporate mechanisms to promote accountability among the audit committee, the outside auditors, and management; and last, the substance and timing of audit committee communications with management, and the outside auditor." "Corporate disclosure and transparency are key to good governance and hence, to investors," said NYSE Chairman Richard A. Grasso. "Recommendations that promote transparency will benefit investors and public corporations alike by ensuring that corporate reporting is kept to the highest standards." Frank G. Zarb, Chairman and Chief Executive Officer of the NASD, said, "Corporate governance is a key issue facing the management of publicly traded companies, and the role of audit committees is critical to that process. These recommendations are a thoughtful product of the expertise in this area, and are especially helpful because they take into account the needs of the nation's smaller but growing publicly traded companies. We look forward to bringing these recommendations before appropriate boards and committees." SEC Chairman Arthur Levitt said, "This action plan represents meaningful, thoughtful and far-ranging recommendations to strengthen the financial reporting process. I believe that the implementation of these recommendations, among other things, will augment the effective oversight by audit committees and expand their independence and expertise. Quality, transparent financial reporting is indispensable to strong financial markets. Given the broad spectrum of participation in this endeavor, I strongly urge all participants at whom this report is directed to act expeditiously on these recommendations." The committee was charged with undertaking an intensive study of the effectiveness of audit committees in discharging their oversight responsibilities and, within 90 days, making concrete recommendations for improvement. In compiling the 71-page report, the committee sought input from a wide range of constituencies through a public hearing and open request for formal written comments on the topic. Representatives of more than 25 different financial and accounting organization responded. TEN POINT PLAN TO IMPROVE AUDIT COMMITTEE OVERSIGHT The following recommendations are excerpted from the Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. Copies of the entire report can be obtained from the public affairs offices of the NYSE or the NASD, or on-line at www.nyse.com or www.nasd.com. 1. Revise Definition of Independent Director The Committee recommends that both the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) adopt the following definition of independence for purposes of service on the audit committee for listed companies with a market capitalization above $200 million (or a more appropriate measure for identifying smaller-sized companies as determined jointly by the NYSE and the NASD): Members of the audit committee shall be considered independent if they have no relationship to the corporation that may interfere with the exercise of their independence from management and the corporation. Examples of such relationships include: - a director being employed by the corporation or any of its affiliates for the current year or any of the past five years; - a director accepting any compensation from the corporation or any of its affiliates other than compensation for board service or benefits under a tax-qualified retirement plan; - a director being a member of the immediate family of an individual who is, or has been in any of the past five years, employed by the corporation or any of its affiliates as an executive officer; - a director being a partner in, or a controlling shareholder or an executive officer of, any for-profit business organization to which the corporation made, or from which the corporation received, payments that are or have been significant to the corporation or business organization in any of the past five years; - a director being employed as an executive of another company where any of the corporation's executives serves on that company's compensation committee. A director who has one or more of these relationships may be appointed to the audit committee, if the board, under exceptional and limited circumstances, determines that membership on the committee by the individual is required by the best interests of the corporation and its shareholders, and the board discloses in the next annual proxy statement subsequent to the determination, the nature of the relationship and the reasons for that determination. 2. Require Independent Audit Committee The Committee recommends that in addition to adopting and complying with the definition of independence set forth above for purposes of service on the audit committee, the NYSE and the NASD require that listed companies with a market capitalization above $200 million (or a more appropriate measure for identifying smaller-sized companies as determined jointly by the NYSE and the NASD) have an audit committee comprised of solely independent directors. 3. Mandate Minimum Audit Committee Size and Increased Financial Literacy The Committee recommends that the NYSE and the NASD require listed companies with a market capitalization above $200 million (or a more appropriate measure for identifying smaller-sized companies as determined jointly by the NYSE and the NASD) to have an audit committee comprised of a minimum of three directors, each of whom is financially literate (as described in Section III.A.2. of this Report) or becomes financially literate within a reasonable period of time after his or her appointment to the audit committee, and further that at least one member of the audit committee have accounting or related financial management expertise. 4. Mandate Written Charter Detailing Responsibilities and Duties The Committee recommends that the NYSE and the NASD require the audit committee of each listed company to (i) adopt a formal written charter that is approved by the full board of directors and that specifies the scope of the committee's responsibilities, and how it carries out those responsibilities, including structure, processes, and membership requirements, and (ii) review and reassess the adequacy of the audit committee charter on an annual basis. 5. Mandate Annual Public Disclosure of Audit Committee Activities The Committee recommends that the Securities and Exchange Commission (SEC) promulgate rules that require the audit committee for each reporting company to disclose in the company's proxy statement for its annual meeting of shareholders whether the audit committee has adopted a formal written charter, and, if so, whether the audit committee satisfied its responsibilities during the prior year in compliance with its charter, which charter shall be disclosed at least triennially in the annual report to shareholders or proxy statement and in the next annual report to shareholders or proxy statement after any significant amendment to that charter. 6. Clarify Oversight Responsibility for Outside Auditor's Engagement The Committee recommends that the listing rules for both the NYSE and the NASD require that the audit committee charter for every listed company specify that the outside auditor is ultimately accountable to the board of directors and the audit committee as representatives of shareholders, and that these shareholder representatives have the ultimate authority and responsibility to select, evaluate, and, where appropriate, replace the outside auditor (or to nominate the outside auditor to be proposed for shareholder approval in any proxy statement). 7. Mandate Discussion with Outside Auditor Regarding Independence The Committee recommends that the listing rules for both the NYSE and the NASD require that the audit committee charter for every listed company specify that the audit committee is responsible for ensuring its receipt from the outside auditors of a formal written statement delineating all relationships between the auditor and the company, consistent with Independence Standards Board Standard 98-1, and that the audit committee is also responsible for actively engaging in a dialogue with the auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the auditor and to take, or recommend that the full board take, appropriate action to ensure the independence of the outside auditor. 8. Require Outside Auditor to Discuss Quality of Financial Reporting The Committee recommends that Generally Accepted Auditing Standards (GAAS) require that a company's outside auditor discuss with the audit committee the auditor's judgments about the quality, not just the acceptability, of the company's accounting principles as applied in its financial reporting; the discussion should include such issues as the clarity of the company's financial disclosures and degree of aggressiveness or conservatism of the company's accounting principles and underlying estimates and other significant decisions made by management in preparing the financial disclosure and reviewed by the outside auditors. This requirement should be written in a way to encourage open, frank discussion and to avoid boilerplate. 9. Require Audit Committee Annual Letter to Shareholders The Committee recommends that the SEC require all reporting companies to include a letter from the audit committee in the company's annual report to shareholders and Form 10-K Annual Report disclosing whether or not, with respect to the prior fiscal year: (i) management has reviewed the audited financial statements with the audit committee, including a discussion of the quality of the accounting principles as applied and significant judgments affecting the company's financial statements; (ii) the outside auditors have discussed with the audit committee the outside auditors' judgments of the quality of those principles as applied and judgments referenced in (i) above under the circumstances; (iii) the members of the audit committee have discussed among themselves, without management or the outside auditors present, the information disclosed to the audit committee described in (i) and (ii) above; and (iv) the audit committee, in reliance on the review and discussions conducted with management and the outside auditors pursuant to (i) and (ii) above, believes that the company's financial statements are fairly presented in conformity with Generally Accepted Accounting Principles (GAAP) in all material respects. 10. Mandate Interim Review of Quarterly Financial Reporting The Committee recommends that the SEC require that a reporting company's outside auditor conduct an SAS 71 Interim Financial Review prior to the company's filing of its Form 10-Q. The Committee further recommends that SAS 71 be amended to require that a reporting company's outside auditor discuss with the audit committee, or at least its chairman, and a representative of financial management, in person, or by telephone conference call, the matters described in AU Section 380, Communications With the Audit Committee, prior to the filing of the Form 10-Q (and preferably prior to any public announcement of financial results), including significant adjustments, management judgments and accounting estimates, significant new accounting policies, and disagreements with management. BLUE RIBBON COMMITTEE MEMBERS In addition to Mr. Whitehead and Mr. Millstein, the Blue Ribbon committee comprised the following individuals: - John H. Biggs, Chairman, President & CEO, TIAA-CREF; - Frank J. Borelli, Senior Vice President, CFO & Director, Marsh & McLennan Cos.; - Charles A. Bowsher, Former Comptroller General of the U.S.; - Dennis D. Dammerman, Vice Chairman and Executive Officer, General Electric Co.; - Richard A. Grasso, Chairman & CEO, New York Stock Exchange; - Philip Laskawy, Chairman & CEO, Ernst & Young LLP; - James J. Schiro, CEO, PricewaterhouseCoopers; - William C. Steere, Jr., Chairman & CEO, Pfizer; and - Frank G. Zarb, Chairman & CEO, National Association of Securities Dealers. # # #