Consob
(Commissione Nazionale per le Società e la Borsa)

Rome, February 25, 2003

ISSUERS DIVISION

Corporate Controls Office

International Relations Office

Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549 (USA)

Reference no.: 3011206

Case no.: 2062709

Subject: Standards Relating to Listed Company Audit Committees - Proposed rule File No. S7-02-03.

Dear Mr. Katz,

In this letter the competent Offices of Consob (Commissione Nazionale per le Società e la Borsa) set out their comments on the proposed rule "Standards Relating to Listed Company Audit Committees", issued pursuant to section 301 of the Sarbanes-Oxley Act.

Consob has carefully followed the work of Congress and the SEC leading to the enactment of the Sarbanes-Oxley Act and the consequent intense regulatory activity and fully agrees with the basic principles underlying the reform.

In Italy the issues addressed in the above-mentioned reform have been and are being addressed by Consob, which has always played a pivotal role in the system regulating the financial markets with a view to ensuring their proper functioning, a role that was strengthened in 1998 with the enactment of the Consolidated Law on Financial Intermediation (hereinafter the Consolidated Law).

This law (Legislative Decree 58/1998) comprehensively revised all the legislation specifically concerned with the regulation of Italy's financial markets and includes a series of provisions intended to guarantee the transparency of financial information and safeguard the interests of the investing public, objectives that are identical to those being pursued in the reform under way in the United States.

As part of the reform of Italy's legislation on financial markets, Parliament approved provisions concerning the corporate governance of Italian companies with shares listed on regulated markets. Among other matters, these provisions cover the issues addressed in the Sarbanes-Oxley Act and the proposed SEC rule on audit committees.

The system of corporate controls (and corporate governance) that has been put in place for listed companies assigns different roles and functions to the various actors involved in corporations (such as the governing bodies - the shareholders' meeting, the board of directors and the board of auditors, etc. - and those outside - external auditing firms, minority interests and individual shareholders, etc.). In this system Consob plays a fundamental role, with powers of supervision and intervention.

We are convinced, after four years of experience with the framework created by the Consolidated Law, that the guarantees and safeguards it provides are equivalent to those that the Sarbanes-Oxley Act and the related SEC implementing rules are intended to establish.

In light of this equivalence, we consider that the rules and regulations to which Italian listed companies are subject pursuant to the Consolidated Law are capable of achieving the same aims as the new US legislation.

We are therefore of the view that the conditions exist for total exemption from all the provisions of the Sarbanes-Oxley Act and the SEC's rules (including others than those referred to in section 301 and the related implementing rule considered here) that require the establishment of an audit committee with specific functions. In what follows we set out the grounds on which this view is based. We also point out that the duplication of applicable provisions that would occur in the absence of such an exemption is likely to give rise to interpretative doubts, as well as making circumvention easier.

Turning to the proposed rule on audit committees, paragraph 10A-3(c)(2)(i) envisages the possibility of exempting foreign private issuers from some of the audit committee requirements.

This proposal, however, does not guarantee Italian issuers a sufficiently broad exemption, such as they should be granted on the basis of criteria of equivalence. In fact, even if the board of auditors provided for in Italian law (collegio sindacale) can be considered comparable to the "board of auditors" referred to in the proposed rule and would satisfy the requirements regarding the composition of this body and the independence of its members set out in points (B), (C) and (D) of paragraph 3(c)(2)(i), as regards points (E) and (F), the following should be noted.

The Consolidated Law assigns the members of the board of auditors (hereinafter the auditors) a key role in the Italian system of corporate governance that, even though it does not have the direct objective of overseeing the work of the external auditing firm, exercises much broader control on the whole management of the company. This objective is pursued by checking compliance with the law and the bylaws, observance of the principles of correct management, and the adequacy of the company's organizational structure, internal control system and administrative and accounting system and the reliability of the latter in correctly representing the company's transactions (Article 149 of the Consolidated Law).

In performing these complex functions, the auditors have wide-ranging powers to obtain information from the directors and the persons assigned to internal control and may at any time carry out inspections and controls, if necessary using employees of the company (Articles 150 and 151 of the Consolidated Law). In addition, the auditors may also obtain data and information relevant to the performance of their duties from the external auditing firm, and in carrying out their oversight activity are therefore required to establish a dialogue with the external auditing firm and to be in a position to assess its work, as an effect of carrying out their broader oversight activity.

As for the resolution of disagreements between management and the external auditing firm regarding financial reporting, if the external auditing firm is faced with a problem in relation to which a disagreement has arisen with management, it undoubtedly has the right/duty to make the circumstances known to the board of auditors, which will take the measures prescribed by law. Such a course of behaviour not only corresponds fully to the rationale of Article 150 of the Consolidated Law, which requires the board of auditors and the external auditing firm to exchange data and information, but, in the event of serious irregularities, the external auditing firm is under an obligation to inform the board of auditors and Consob of any censurable facts (Article 155 of the Consolidated Law).

The duties of the board of auditors also include the obligation to notify Consob of any irregularities it finds in the performance of its oversight activity (Article 149 of the Consolidated Law). For its part, Consob may report the auditors to the courts if it has a well-founded suspicion of serious irregularities in the performance of their duties (Article 152 of the Consolidated Law). It should be noted, moreover, that Article 2638 of the Civil Code makes it a penal offence to obstruct the performance of the functions of public supervisory authorities (including Consob) and that this provision also applies to the auditors.

The board of auditors is required to report to the shareholders' meeting called to approve the annual accounts on its oversight activities and any omissions or censurable actions it has found. It is on this occasion that the auditors may make proposals to the shareholders' meeting concerning the annual accounts and their approval (Article 153 of the Consolidated Law). The report to the shareholders' meeting is therefore a fundamental aspect of the activity of the board of auditors and in Communication 1025564/2001 Consob established detailed rules regarding its content.

In the same communication Consob stressed that constant collaboration between the external auditing firm and the board of auditors was one of the main prerequisites for the proper working of the system of corporate controls. In this context, the board of auditors is required to examine the work of the external auditing firm in order to make comments and proposals in their report regarding any qualifications or emphasis of matter paragraphs included in the external auditing firm's report.

It should also be noted that the above-mentioned Consob communication requires the report of the board of auditors to specify any additional engagements the external auditing firm and entities related to it are appointed to perform, together with the costs thereof. In this respect it should be noted that the board of auditors must issue an opinion to the board of directors when the external auditing firm is appointed to perform non-audit engagements (Consob Communication 97001574/1997).

Lastly, as regards the responsibility of the auditors for the documents they are required by law to prepare, it should be noted that Articles 2621 and 2622 of the Civil Code make it a penal offence for them to make false statements regarding a company's affairs.

It should also be recalled that the Italian system of corporate controls provides for Consob to supervise the auditing firms that audit listed companies' annual accounts, which further strengthens the guarantees described above. In fact Article 162 of the Consolidated Law requires Consob to supervise the activity of the auditing firms entered in its Special Register to verify their independence and technical adequacy. Such registered auditing firms are the only ones allowed to audit the annual accounts of listed issuers.

As regards the responsibility of the auditors for the appointment of the external auditing firm and the revocation of the engagement, it should be noted that the board of auditors is required to render an opinion and that this must be submitted to the shareholders' meeting (Article 159 of the Consolidated Law), which has the power to decide; such opinions have to be sent to Consob as well. In the case of appointments, the opinion must contain an assessment of the auditing firm's independence and technical suitability, with particular regard to the adequacy and completeness of the audit plan and of the firm's organization in relation to the size and complexity of the engagement to be performed.

The above rules are contained in Article 146 of Consob Regulation 11971/1999 on issuers, which also states that in the event of a negative opinion on the appointment of the external auditing firm or the revocation of the engagement, the board of auditors must send its opinion to Consob immediately.

It should be noted that although the board of auditors has to examine the proposal made by the auditing firm in order to render its opinion on the firm's ability to do the work, it is not specifically required to comment on the firm's compensation and is not empowered to determine it, since this decision is entrusted to the shareholders' meeting (Article 159 of the Consolidated Law).

In view of the foregoing, we believe that the regulatory framework created by the Consolidated Law provides guarantees that overall are equivalent to those the Sarbanes-Oxley Act and the related SEC implementing rules are intended to establish.

We are therefore of the view that the conditions exist for total exemption from all the provisions of the Sarbanes-Oxley Act and the SEC's rules that require the establishment of an audit committee with specific functions and that account should be taken of this in the promulgation of the rule in question.

We inform you that the Consolidated Law on Financial Intermediation and the related implementing regulations issued by Consob are posted in Italian and English on Consob's website (www.consob.it).

We are available to provide any further information or clarification you may need and to meet with you in order to examine the questions addressed above in greater depth.

Sincerely yours,

Head of the International Relations Office C. Biancheri

Head of the Issuers Division G. Cannizzaro

N.DMS: 030510078