ONE TECHNOLOGY PARKWAY SOUTH
NORCROSS, GEORGIA 30092
November 29, 1999
Mr. Jonathan G. Katz
Secretary, Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE:Proposed Rules Relating to Audit Committee Disclosure
Commission Release No. 34-41987; File No. S7-22-99
Dear Mr. Katz:
Thank you for the opportunity to comment on the proposed rule changes relating to audit committee disclosure set forth in the above-referenced Release. We support the Commission’s efforts to promote quality financial reporting, and with respect to the principal changes proposed, we have no comment or objection to (1) pre-filing review of quarterly financial statements, or (2) disclosure about "independence" of audit committee members. However, we believe that the proposed changes requiring the periodic filing of a report of the audit committee, including a certification, and the requirement to include periodically the charter of the audit committee in the Company’s proxy materials impose substantial burdens and additional risk on directors who serve on audit committees of publicly-held companies without a counterbalancing improvement in the quality of financial information filed with the Commission.
Audit Committee Report
The Commission proposal would require that issuers include audit committee reports in their proxy statements. In the report, the audit committee would state whether it has: (1) reviewed and discussed the audited financial statements with management; (2) discussed with the independent auditors the matters required to be discussed by SAS No. 61; and (3) received certain disclosures from the auditors regarding the auditors’ independence. The Commission proposal also would require that the report of the audit committee include a statement by the audit committee whether, based on such review and discussions, anything has come to the attention of the members of the audit committee that caused the audit committee to believe that the audited financial statements included in the annual report contain an untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading. In making this proposal, we understand from the Release that the Commission did not intend to subject companies or their directors to increased exposure to liability under the federal securities laws, or to create new standards for directors to fulfill their duties under state corporation law. We submit that the proposal does not accomplish this objective.
We believe that the Commission’s proposal relating to audit committee reports would be injurious to the audit committee role for the following reasons:
1.Public companies, such as Scientific-Atlanta, Inc., engage independent auditors to audit and certify their financial statements as experts. The auditors, not the audit committee, have this responsibility. The proper role of the audit committee is to make recommendations as to the selection of the independent auditors, to evaluate the audit services and the financial, accounting and internal audit policies, functions, systems and procedures, and to approve the engagement of the independent auditors to provide non-audit services. The audit committee should not be expected to certify the financial statements, even to the extent proposed by the Commission. It is not realistic to assume that audit committee members have the time, or the expertise, to become familiar enough with and to understand the intricacies of the company’s financial statements to the extent that they can make a meaningful certification as to the truth, accuracy or completeness of those financials. This proposal undermines the protections that the Commission put into place when it permitted issuers to engage experts to certify financial statements. Members of the audit committee are not, and cannot be expected to become, experts in this sense. Therefore, it would be unreasonable for the Commission or shareholders to rely upon such a certification by the committee.
2.Under the Commission’s proposal, the audit committee members are required to sign the "anything has come to their attention" certificate regarding the issuer’s financial statements. This clearly creates two classes of directors — those who sign the certification and those who do not. If signing the report is not intended to change the responsibility or exposure to liability of the audit committee members, then why require them to sign a certificate, which the remainder of the board does not sign? It would be a useless, and confusing, act.
3.We believe that all directors have equal responsibility with respect to the integrity of a company’s financial statements by virtue of their signature on the Form 10-K. This liability and responsibility is already clearly set forth in the securities laws. Although we understand that the Commission’s proposal is not intended to expose audit committee members to more liability, we submit that such an assumption is not consistent with a requirement for their signature under an audit committee report. Buyers and sellers of the company’s shares are very likely to view the certification in the audit report as placing more responsibility on the audit committee. Courts may well agree, else why the requirement for a certification in the first place? We do not believe that the Commission’s proposed safe harbor provides meaningful protection in this case. The fact that the certification is not deemed "filed" will not prevent courts from finding liability under Rule 10b-5.
4.The proposed audit committee report is quite different from the board compensation committee report on executive compensation included in proxy statements. The latter simply sets forth the committee’s policies on compensation, and includes no certification. In contrast, the proposed audit committee report requires certification of the financial statements.
Scientific-Atlanta, Inc. (NYSE: SFA) is an international telecommunications company with revenues of $1.94 billion during the fiscal year ended July 2, 1999. Our audit committee consists of three highly qualified members, including (1) a principal in a private merchant banking firm, who was formerly chairman and chief executive officer of a major supplier of food service equipment throughout the world; (2) a former president of a healthcare information systems company and former chief executive officer of a telecommunications company; and (3) a partner at a major Atlanta law firm, who was formerly a U.S. Senator. We believe that the burdens resulting from the proposed rule changes would make it more difficult for publicly-held companies to find qualified people such as these directors who are willing to serve on audit committees. Why would they incur the potential additional risk exposure? Certainly it is not the few thousand dollars in meeting fees received by members of the committee.
Audit Committee Charters
We also oppose the Commission’s proposal requiring an issuer disclose in its proxy statement whether its audit committee has adopted a written charter and, if the audit committee has adopted a charter, to include a copy of the charter as an appendix to the issuer’s proxy or information statement at least once every three years.
We believe that this requirement would probably cause companies to shorten their audit committee charters. Our audit committee currently has a very detailed and specific charter. However, if the audit committee charters were required to be disclosed in our proxy statement, it would be my recommendation that the Committee consider shortening the charter. It is unlikely that audit committee members would not want to risk increased liability exposure for failure to comply with every requirement set forth in a detailed, lengthy charter. As a result, we expect this proposal to prompt publicly-held companies to adopt more general boilerplate charters, which are not likely to be helpful to either the committee or the quality of reported financial results.
Thank you for the opportunity to express our views.
/s/William E. Eason, Jr.
William E. Eason, Jr.
Senior Vice President and