Jonathan G. Katz
Dear Mr Katz,
Re: SEC Proposed Rule: Standards Relating To Listed Company Audit Committees, File No. S7-02-03
1. FEE (Fédération des Experts Comptables Européens - European Federation of Accountants) welcomes the opportunity to provide comments on the Proposed Rule on Standards Relating To Listed Company Audit Committees. FEE is the representative body for the accountancy profession in Europe. We have 41 Member Bodies in 29 countries - as listed in the annex to our letter of 20 December 2002.
2. FEE has a direct interest in the SEC rules since the provisions of the Sarbanes-Oxley Act also address foreign registrants, their affiliates and foreign affiliates of US registered public accounting firms. As a general policy, we support international convergence of standards to enhance global confidence in auditing. We strongly support IFRS, ISA and the IFAC Code of Ethics and firmly believe that capital markets require principles-based global solutions, and not unilaterally imposed rules-based requirements. The SEC should, therefore, prepare its rules with this aim in view. The Framework of independence approach, based on threats and safeguards, could also be a useful way of assessing audit committee members' independence.
3. FEE supports the overall objective of the Sarbanes-Oxley Act to restore investor confidence in the functioning of the capital market. However, the Act is very much related to the US legal environment and can be seen as a reaction to mainly US financial reporting problems. For European companies and their auditors, many of the Sarbanes-Oxley Act measures, especially as regards their details, are, in our opinion, unnecessary, disproportionate, burdensome, or even impossible to apply. Moreover, the percentage of trading volume in shares of EU registrants at the NYSE compared to that at domestic EU stock exchanges is relatively small. The vast majority of foreign registrants' shares are traded on domestic EU markets. However, the full weight of the Sarbanes-Oxley Act is imposed on these companies and their auditors, subject only to some recent relief to accommodate certain legal conflicts.
4. We fully support the European Commission in seeking recognition of equivalence of EU corporate governance systems, including regulation and public oversight of statutory auditors. EU companies and auditors are already subject to longstanding, highly developed corporate governance requirements, tailored to their specific requirements.
5. FEE fully supports the importance of the audit committee function for listed companies both within a unitary and two-tier board structure. The use of audit committees within the Board of Directors or Supervisory Board should be encouraged and FEE supports making the audit committee function mandatory for listed companies by use of corporate governance codes or soft law. The audit committee is considered as a preparatory committee of the Board or Supervisory Board, reporting to those boards but without direct responsibility. The audit committee function needs to be fulfilled by non-executive directors where there is no separate audit committee. In Europe, the High Level Group of Company Law Experts1 has at the end of last year published its report on company law and corporate governance. It recognises the importance of the audit committee function: "Listed companies should be required to ensure that the nomination and remuneration of directors and the audit of the accounting for the company's performance within the board are decided upon exclusively by non-executive or supervisory directors who are in the majority independent. Provisions on the role and responsibilities of audit committees (or any equivalent body), with respect to both the external and internal aspects of audit, should be included in the proposed Recommendation on the role of non-executive and supervisory directors."
We would like to make the following comments on the proposed changes.
Definition audit committee
6. It is stated that an issuer either may have a separately designated audit committee composed of members of its board or, if it chooses to do so or if it fails to form a separate committee, the entire board of directors would constitute the audit committee. This would imply that all the directors under a unitary system have to be independent as defined by the Sarbanes-Oxley Act. This is in practice not a valuable and realistic alternative since a wide range of experience with the company would be lost. Effectively this constitutes a requirement to have an audit committee under a unitary board structure rather than a choice. We are of the opinion that the alternative to having a separately designated audit committee should be formulated in terms of all non-executive directors fulfilling the functions of the audit committee, in the circumstances envisaged.
A. Audit Committee Member Independence
7. We are of the opinion that a conceptual framework approach with assessment of threats and safeguards, as used in Europe to assess auditor independence, would also be of great benefit to the assessment of independence of audit committee members. Such principles give more satisfactory results than a lengthy set of detailed rules, the spirit of which can be circumvented. Ethical issues cannot be adequately dealt with solely through rules, prohibitions and/or legislation.
8. We are of the opinion that this section should also have addressed share-based compensation such as options since they could impair the independence of audit committee members given the risk of short-term orientation.
B. Responsibilities Relating to Registered Public Accounting Firms
9. The text states that the proposed requirement does not conflict with, and would not be affected by, any requirement under a company's governing law or documents or other base country requirements that require shareholders to elect, approve or notify the selection of the issuer's auditor. It is not clear to us why the exemption is formulated in terms of non-conflict rather than in terms of an exemption. Using the work "exemption" would improve the clarity of the text.
10. The way the exemption is formulated may still pose some problems since - at least in some jurisdictions - the auditor is appointed through the board. We support the position that, if under the law of another jurisdiction the auditor is not appointed by the audit committee, the audit committee is required to make a recommendation on the appointment of the auditor.
11. Taking into account the legal constraints in Europe, we want to observe that if pre-clearance by the audit committee or a comparable organ were to be introduced, it should be sufficient that the audit committee lays down a purchasing policy for non-audit services. The audit committee's task would then be the monitoring of the implementation of that policy.
D. Authority to Engage Advisors
12. FEE fully supports that non-executive directors or members of the audit committee should be entitled to obtain independent advice.
13. Many of the requirements set out in the proposed rules request fundamental changes of foreign issuers and their auditors. Therefore an appropriate extended transitional period needs to be introduced.
We would be pleased to discuss this letter with you.
Encl.: FEE letter of 20 December 2002 on final rulemaking
Jonathan G. Katz
Dear Mr Katz,
Re: Final rulemaking
I am writing to you in my capacity of President of the European Federation of Accountants (FEE - Fédération des Experts Comptables Européens). On 19 December we had our General Assembly at which all our 41 Member Bodies from 29 countries were present (see appendix attached for details about our membership), represented by their respective Presidents.
The SEC proposed rules following the Sarbanes-Oxley Act and the deadline of 26 January for final rulemaking were the most urgent issues on our agenda. Our General Assembly took the unanimous decision of expressing the European profession's concerns to you.
We are aware about the dialogue between the SEC and the European Commission about appropriate exemptions and recognition of equivalence of European systems. We fully support this dialogue. EU arrangements provide full protection for investors and other stakeholders for corporate governance, auditor regulation and enforcement and are broadly equivalent to those in the US.
We believe that much more debate and consideration is needed before the rules applicable to foreign registrants and their auditors are finalised and we do not believe that the current timetable will lead to proper due process on these complex issues.
The General Assembly yesterday unanimously endorsed a strong request to the SEC that there should be deferral of the rulemaking in respect of foreign registrants and their auditors, unless the dialogue between the SEC and the European Commission results in an acceptable solution before 26 January.
In relation to the proposed rule on Auditor Independence Requirements and the related Round Table of 17 December, in particular we express our major concerns about the coverage of tax services by the proposed rules and commentary since this goes considerably beyond the Sarbanes-Oxley Act. We therefore request the SEC not to address tax services at all in the rules and commentary on the rules.
We furthermore would underline that, in relation to internal rotation, it is crucial that the global solution of IFAC in its Code of Ethics section 8 and the approach of the EC Recommendation on Independence on internal partner rotation is accepted as equivalent - without extension of the period or the range of audit personnel involved.
FEE will also make a direct submission on the proposed rule "Strengthening the Commission's Requirements Regarding Auditor Independence".
To conclude: All 41 of our Member Bodies consider that there should be deferral of rulemaking in respect of foreign registrants and their auditors and that the rulemaking should not go further than the requirements of the Sarbanes-Oxley Act.
ANNEX - List of FEE Member Bodies
KAMMER DER WIRTSCHAFTSTREUHÄNDER (KWT)
INSTITUT ÖSTERREICHISCHER WIRTSCHAFTSPRÜFER (IWP)
INSTITUT DES EXPERTS-COMPTABLES ET DES CONSEILS FISCAUX (IEC),
INSTITUT DES REVISEURS D'ENTREPRISES (IRE),
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN BULGARIA
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF CYPRUS (ICPA)
KOMORA AUDITORU CESKE REPUBLIKY (KACR)
FORENINGEN AF STATSAUTORISEREDE REVISORER (FSR)
KHT - YHDISTYS FÖRENINGEN CGR
COMPAGNIE NATIONALE DES COMMISSAIRES AUX COMPTES (CNCC)
INSTITUT FRANCAIS DES EXPERTS COMPTABLES (IFEC)
ORDRE DES EXPERTS-COMPTABLES (OEC)
INSTITUT DER WIRTSCHAFTSPRÜFER (IDW)
SILOGOS EGEKRIMENOU LOGISTON - ELEGTON ELLADOS (SELE)
SOMA ORKOTON ELEGTON LOGISTON (SOEL)
MAGYAR KÖNYVVIZSGÁLÓI KAMARA (MKVK)
FÉLAG LÖGGILTRA ENDURSKODENDA (FLE)
INSTITUTE OF CHARTERED ACCOUNTANTS IN IRELAND (ICAI)
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND (ICPAI)
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN ISRAEL (ICPA)
CONSIGLIO NAZIONALE DEI DOTTORI COMMERCIALISTI (CNDC)
CONSIGLIO NAZIONALE DEI RAGIONIERI E PERITI COMMERCIALI (CNRPC)
INSTITUT DES REVISEURS D'ENTREPRISES (IRE)
ORDRE DES EXPERTS COMPTABLES (OEC)
THE MALTA INSTITUTE OF ACCOUNTANTS (MIA)
CONSEIL DE L'ORDRE DES EXPERTS COMTABLES DE MONACO (COECM)
KONINKLIJK NEDERLANDS INSTITUUT VAN REGISTERACCOUNTANTS (NIVRA)
DEN NORSKE REVISORFORENING (DNR)
KIBR - NATIONAL CHAMBER OF STATUTORY AUDITORS
ORDEM DOS REVISORES OFICIAIS DE CONTAS (OROC)
CORPUL EXPERTILOR CONTABILI SI CONTABILILOR AUTORIZATI DIN ROMANIA (CECCAR)
SLOVENSKA KOMORA AUDITOROV
SLOVENSKI INSTITUT ZA REVIZIJO
INSTITUTO DE AUDITORES-CENSORES JURADOS DE ESPAÑA (IACJCE)
THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS (ACCA)
CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS (CIMA)
CHARTERED INSTITUTE OF PUBLIC FINANCE AND ACCOUNTANCY (CIPFA)
INSTITUTE OF CHARTERED ACCOUNTANTS IN ENGLAND AND WALES (ICAEW)
INSTITUTE OF CHARTERED ACCOUNTANTS OF SCOTLAND (ICAS)