United States of America
Comments of the Edison Electric Institute
I. Introduction and Overview
The Edison Electric Institute ("EEI") appreciates the opportunity to comment on the Securities and Exchange Commission's ("SEC" or "the Commission") Proposed Rule on Standards Relating to Listed Company Audit Committees.1 While EEI is generally supportive of much of the Commission's proposal, we have several concerns primarily associated with procedures for handling complaints.
EEI is the association of the United States investor-owned electric companies, international affiliates, and industry associates worldwide. Our U.S. members serve more than 90 percent of the ultimate customers in the shareholder-owned segment of the industry and nearly 70 percent of all electric utility ultimate customers in the nation, generating almost 70 percent of the electricity produced in the United States.
The Commission states that its proposed new rule would direct national securities markets to prohibit the listing of any security of an issuer not complying with audit committee requirements set out in the Sarbanes-Oxley Act of 2002.2 While EEI is supportive of audit committee responsibilities relating to auditors, we believe that any new requirement to disclose procedures for handling complaints could be confusing considering existing requirements. Should the Commission find that such disclosure is beneficial, consideration should be given to expanding Section 302 certification requirements. In addition, EEI is concerned that a final rule that would mandate who is responsible for the receipt of complaints is overly prescriptive. Any mandate should be limited to requiring that the responsibility be assigned only to a function or individual reporting directly to the Audit Committee.
The following comments will further detail EEI's concerns with the Commission's proposed rule.
II. EEI Comments on the Commission's Proposal
A. Audit Committee Responsibilities Relating to Auditors
First, EEI would like to commend the Commission and offer our support regarding the proposed rules specifying audit committee responsibility concerning the appointment, compensation, retention and oversight of the work of the independent auditor.
The Commission requested comment on whether or not the audit committee should also be directly responsible for the appointment, compensation, retention and oversight of an issuer's internal auditor. EEI believes that as a practical matter, this oversight is in place at most investor-owned electric utilities. The audit committee is responsible, as stipulated in the audit committee charter, to appoint and retain the Chief Audit Executive (CAE). Professional literature, including academic research has consistently stated that it is best practice for the audit committee to have such oversight and it is appropriate for the Commission to codify such responsibility. In addition, the Institute of Internal Auditor's (IIA) performance standards states that "The chief audit executive should report periodically to the board and senior management on the internal audit activity's purpose, authority, responsibility, and performance relative to its plan. Reporting should also include significant risk exposures and control issues, corporate governance issues, and other matters needed or requested by the board and senior management." 3 With due consideration to the fact that many companies fulfill these objectives through the CAE it would be appropriate for the Commission to include similar guidelines in the rules as it relates to the audit committee.
B. Procedures for Handling Complaints
EEI does not believe that an issuer should be required to disclose the procedures for handling complaints that have been established or any changes to those procedures. The investing public is fully served by the requirement to have such procedures. To require an issuer to single out compliance with an individual law or regulation to the exclusion of others could create confusion and raises a question as to the standard to be used in determining which laws and regulations warrant such disclosure. Should the Commission conclude an affirmative confirmation is beneficial, consideration should be given to expanding the existing Section 302 quarterly certification requirements to fill this need.
Many investor-owned electric utilities currently have processes in place for the receipt, retention and treatment of complaints and for the confidential, anonymous submission by employees of their concerns regarding questionable accounting or auditing matters ("complaints"). This process is event-driven and includes an anonymous telephone hotline, written policies and procedures for the accumulation of such complaints. As soon as a complaint is reported, it is documented and followed up by the appropriate department(s). These procedures involve internal audit, the legal department and corporate security, individually and collectively - as needed. The complaints, the actions taken, and the resolutions are reviewed, evaluated and reported together by internal audit to the audit committee. This process has proven to be adequate and effective for its purpose. It is accepted practice in industry for complaints, generally defined as "investigations" to be processed and reported in this manner by internal audit, the corporate compliance or security functions, the legal department or the corporate secretary's office. The law is clear that no materiality standard is applicable to complaints as defined by the Act - all must be reported.
EEI concurs with the Commission's proposal not to mandate specific procedural requirements to the audit committee. Each registrant's circumstances will vary. The requirements of the Act can be fulfilled through a variety of equally effective approaches. Further, the absence of a highly prescriptive direction will provide the flexibility warranted by the scale of issuers. For example small-cap domestic companies will clearly have different operating models and resource solutions available to them than larger, mature international companies.
EEI does not believe that the Commission should mandate a standard for how long complaints must be retained. Since the rules will require that the complaints be processed in accordance with audit committee approved procedures, which will include reporting protocols and retention standards consistent with existing requirements, no additional requirement should be necessary. It should be noted that reports to audit committees are permanent records of an issuer.
In addition, EEI does not believe that it is necessary to prescribe who could or could not be responsible for the receipt and treatment of complaints. As noted before, each company's circumstances will vary and multiple equally effective solutions exist. If the Commission deems such a requirement necessary, EEI suggests that the parties, which can be designated, be independent of line management and have a direct reporting access to the audit committee. Examples include internal audit, corporate compliance functions, the legal department, and the corporate secretary's office.
III. Summary of EEI Concerns
To summarize the concerns of EEI and our members, we request that the Commission take our concerns into consideration regarding procedures for handling complaints and to not require additional disclosure than those which already exist. If the Commission concludes further disclosure is necessary, we suggest that expanding the existing Section 302 quarterly certification requirements. In addition, mandating who is responsible for the receipt of complaints is overly prescriptive.
If the Commission or its staff have any questions about these comments, please contact either me at the following phone number, Julia Valliere at (202) 508-5449 or David Stringfellow at (202) 508-5494.