January 22, 2003
Jonathan G. Katz
Re: File S7-02-03; Standards Relating to Listed Company Audit Committees
Dear Mr. Katz:
I appreciate the opportunity to comment on the proposed rule, "Standards Relating to Listed Company Audit Committees." As a Chief Audit Executive having worked closely with various audit committees spanning my 31-year career in the financial services industry, I can certainly appreciate the requirement for independent audit committee members. During my career I have been integrally involved in setting standards for the internal auditing profession through my membership on The Institute of Internal Auditors' Internal Auditing Standards Board. As part of my role as President of the National Association of Financial Services Auditors (NAFSA), I have also been a strong advocate of independence for both the internal audit function and the audit committee. It is in the capacity of Chief Audit Executive and management team member that I am concerned with the independence requirements in the SEC proposal.
Many directors, especially those representing community banks, are community leaders themselves and very good customers of the bank. It is the way community bank boards have been structured for decades. Some of those community leaders are attorneys and most community banks avail themselves of local law firms. The concept of "community" is not lost on community bankers! My concern relates to the proposal that "indirect acceptance of compensatory payments includes payments accepted by an entity in which the audit committee member is a partner, member or principal or occupies a similar position and which provides accounting, consulting, legal, investment banking, financial or other advisory services or any similar services to the issuer." Precluding an attorney from becoming a member of an audit committee simply because his/her law firm received compensation for services rendered seems to be inherently unfair and overly restrictive. Without giving consideration to the materiality of such compensation, a $1,000 fee paid to a law firm by an organization would preclude every attorney at that law firm from serving on that organization's audit committee.
In my opinion, it is incumbent upon the SEC to consider the ramifications of this absolute prohibition. The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees also recognized the importance of independence; however, that committee gave the stock exchanges some leeway in determining what would truly impact independence. As a result, the NASDAQ promulgated certain de minimis exceptions related to indirect compensation. It is this concept of de minimis exception that I encourage the SEC to consider and incorporate in its final rules regarding independence of audit committee members. The value to an audit committee having an attorney from the community's most reputable law firm as a member of that committee is immeasurable.
Thank you for your consideration of my comments on this important matter.