Texas Instruments Incorporated
P. O. Box 655474, MS 3999
Dallas, Texas 75265
November 29, 1999
Via e-mail: email@example.com
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W. Stop 6-9
Washington, DC 20549
Re: The Audit Committee Disclosure Release
No. 34-41987; File No. S7-22-99
Ladies and Gentlemen:
We have two principal concerns with the proposed audit committee report. First, the proposed report may have an adverse impact on valuable informal discussions between outside auditors and audit committees. Second, the proposed report may raise unrealistic expectations among investors that could lead to litigation.
1. Informal Discussions
Discussions with outside auditors should not be required as a formal basis for audit committee members to meet a disclosure responsibility mandated by law. It would be counterproductive for the SEC to impose such a requirement.
There is great value in keeping these discussions informal, and not part of a due diligence or other process that is potentially adversarial. As noted in The American Law Institute's Principles of Corporate Governance: Analysis and Recommendations:
"An independent audit committee provides a forum for regular, informal, and private discussion between the external auditor and directors who have no significant relationships with management. In the absence of such a forum, an external auditor would often be reluctant to call for a meeting at the board level unless a problem of great magnitude had arisen. In contrast, the provision of an institutionalized forum facilitates and indeed encourages the external auditor to raise potentially troublesome issues at a relatively early stage, allows the auditor to broach sensitive problems in an uninhibited and private fashion, and gives the auditor assurance that it can readily get a hearing in the event of a disagreement with management." (Comment (c)(iii) to Section 3.05.)
The SEC's proposed audit committee report and the alternatives referred to in the release all run the risk of chilling these informal discussions and thereby significantly reducing the benefit of them. For example, a panelist at a recent securities law institute recommended preparing transcripts of discussions with outside auditors to protect audit committee members in the event of litigation. The downside of turning these discussions into something like a deposition was not explored.
To avoid the risk of creating a stilted, adversarial relationship between outside auditors and audit committees, we recommend against requiring an audit committee report. If a report is required, however, we suggest that paragraph (a) (4) of proposed Item 306 be revised to read as follows: "The audit committee recommended to the board of directors that the audited financial statements be included in the company's Annual Report on Form 10-K [or 10-KSB] filed with the Securities and Exchange Commission."
2. Unrealistic Expectations
We are concerned that the proposed report may create unrealistic expectations among investors that could lead to litigation. Perhaps one approach to this problem is to expressly permit a disclaimer or other cautionary statement in the report. For example, our audit committee's charter includes the following statement:
"The Company's management is responsible for preparing the Company's financial statements. The Company's independent public accountants are responsible for auditing the financial statements. The activities of the Committee are in no way designed to supersede or alter those traditional responsibilities. Membership on the Committee does not call for the professional training or technical skills associated with career professionals in the fields of accounting and auditing. In addition, the Company's independent public accountants and the internal audit staff have more available time and information than does the Committee. Accordingly, the Committee's role does not provide any special assurances with regard to the Company's financial statements, nor does it involve a professional evaluation of the quality of the audits performed by the independent public accountants."
We do not see anything in the proposed rules suggesting that a disclaimer of this sort would be inappropriate. It may be helpful, however, if the proposed rules expressly recognized the potential usefulness of disclaimers or other cautionary statements.
O. Wayne Coon
Secretary, Audit Committee
Texas Instruments Incorporated
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The Honorable Arthur Levitt
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