The State of Wisconsin Investment Board

February 14, 2003


Jonathan G. Katz, Esq.
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: File No. S7-02-03
Standards Relating to Listed Company Audit Committees

Dear Mr. Katz:

The State of Wisconsin Investment Board ("SWIB") appreciates the opportunity to comment on Release No. 33-8173 (the "Release") published by the Securities and Exchange Commission (the "Commission") on the proposed rules relating to listed company audit committee independence standards. SWIB manages the tenth largest public pension fund in the U.S. and currently invests more than $58 billion of retirement funds and government assets. Like many investors, SWIB depends on the audit committee to oversee a company's financial reporting system. As noted in the Release, recent corporate scandals have damaged investor confidence and highlighted the need for "strong, competent and vigilant audit committees with real authority."

SWIB generally supports the proposals, because we have long held the view that audit committees should be comprised solely of independent directors. However, we agree with the comments made by the Council of Institutional Investments (the "Council") in its February 3, 2003 letter. We ask the Commission to consider certain modifications, as discussed below.

Summary of Proposals

Listed company audit committee qualifications are regulated by the self-regulatory organizations (SROs) as part of their listing requirements. Section 301 of the Sarbanes-Oxley Act of 2002 requires the Commission to direct the SROs to prohibit the listing of any security of a company that is not in compliance with several enumerated standards. Consistent with this directive, the Release includes the following proposals:

  1. Audit Committee Independence. The proposed requirements seek to enhance audit committee independence by implementing the following criteria:

    • An audit committee member would be barred from accepting any consulting, advisory or other compensatory fee from the company or an affiliate, other than in the member's capacity as a member of the board of directors and any board committee. Disallowed payments would include payments made either directly or indirectly, such as payments to spouses, law firms, accounting firms, consulting firms, investment banks or similar entities in which audit committee members are partners or hold similar positions.

    • An audit committee member may not be an affiliated person of the company or any subsidiary apart from his or her capacity as a member of the board and any board committee.

    The Release includes proposed exemptions from independence requirements for companies for a period of 90 days following their initial public offering, as well as for committee members who sit on the board of directors of both a parent and its subsidiary, subject to certain requirements.

  2. Responsibilities Relating to Public Accounting Firms. Under the proposed rule, an audit committee would be directly responsible for the appointment, compensation, retention and oversight of the work of the independent auditor, and the independent auditor would have to report directly to the audit committee. The audit committee oversight responsibility would include the authority to:

    • retain, as well as terminate, the outside auditor;

    • approve all audit engagement fees and terms; and

    • approve all significant non-audit engagements.

  3. Procedures for Handling Complaints. The proposal would require audit committees to establish formal procedures for receiving and handling complaints, including the confidential, anonymous submission of concerns by employees, regarding accounting or auditing matters.

  4. Authority to Engage Advisors; Funding. The proposed rule would require the audit committee to have the authority to engage outside advisors, including counsel, as it determines necessary. The proposed rule also would require the company to provide for appropriate funding for payment of compensation to the auditors and any advisors employed by the audit committee.

  5. Disclosure Changes Regarding Audit Committees. The proposals would make certain changes to the Commission's current proxy statement and annual report disclosure requirements. For example, companies that rely on any of the independence exemptions set forth in the proposed rule would need to disclose their reliance on the exemption and their assessment of whether such reliance would materially adversely affect the ability of the audit committee to act independently and to satisfy the other requirements of the proposed new rule.

Analysis of Proposals

SWIB supports the proposals, which will direct the SROs to require all-independent audit committees (or full boards, in the case of companies without audit committees) that are responsible for selecting and overseeing the independent auditor. The procedures for handling complaints should facilitate reporting of questionable practices and alert the audit committee to potential problems before they have serious consequences. An audit committee will be able to function more effectively and independently of management if it has the authority to engage outside advisors and is provided with adequate funding.

Although SWIB generally supports the proposals, we believe the following modifications are needed:

  1. The Commission should require the SROs to adopt a uniform definition of director independence. The SROs all should adopt the same, strict definition of independent director. As the Council noted in its comment letter, the current model is confusing to investors and listed companies, and encourages a "race to the bottom." In accordance with our proxy voting guidelines, and as we have noted in past letters to the Commission, NYSE and Nasdaq, SWIB supports the Council's definition of "independent director," which provides that an "independent director" is someone whose only "non-trivial professional, familial or financial connection to the corporation, its chairman, CEO or any other executive officer is his or her directorship." We urge the Commission to require the SROs to adopt the Council's definition of "independent director."

  2. The Commission should require enhanced disclosure of director relationships. In our February 14, 2002 letter to Chairman Pitt, we asked the Commission to expand its director conflict of interest disclosure requirements. We continue to believe that investors have the right to know about any relationships that may compromise a director's independence and his or her ability to protect shareholder interests. SWIB urges the Commission to enhance disclosure in this area in addition to strengthening SRO director independence standards.

  3. Exceptions to the independence requirements are unnecessary. We agree with the Council that audit committees should consist solely of independent directors, without exception. Accordingly, we believe the exceptions for newly public companies and for committee members who sit on the board of directors of both a parent and subsidiary are unnecessary.

  4. Minimum standards for complaint procedures should be set. The proposal eviscerates the Sarbanes-Oxley requirement that companies establish procedures for receiving and handling accounting and auditing complaints by failing to set minimum standards. Companies with autocratic management structures, bad actors or problems to hide will have no difficulty developing complaint procedures that discourage employees from coming forward and avoiding the creation of an accurate record when they do. Those are the very situations this provision is intended to reach. Companies should at least be required to (a) make a copy of their complaint procedure available to all employees and investors, (b) provide the opportunity to file written complaints, (c) protect employees that use the process from retaliation, (d) offer an avenue for employees to file complaints with, or provide copies of written complaints to, independent directors not on the audit committee or a supervisory authority at the independent auditor who is not involved in auditing the company, (e) provide some follow up or response to each complaint or an explanation as to why a response cannot be provided, and (f) preserve for three years a written record of each complaint and treatment of the complaint and make it available to the SEC or the Public Company Accounting Oversight Board upon request. In addition, the regulation should extend broadly to any complaints "relating to" (not just "regarding") accounting, internal accounting controls or auditing matters, in order to preclude companies from narrowly construing coverage of the provision to technical issues.


As noted in the Release, an independent audit committee with adequate resources is better equipped to oversee a company's financial reporting system and to align corporate interests with those of shareholders. SWIB believes the proposals will assist audit committee members carry out their functions and protect shareholder interests. However, we respectfully ask the Commission to make the modifications we have suggested.

We hope our comments will assist the Commission as it considers the proposals. If we can be of further assistance, please do not hesitate to contact me.

Very truly yours,

Keith Johnson
Chief Legal Counsel