801 MARQUETTE AVE
MINNEAPOLIS, MINNESOTA 55402
November 16, 1999
Proposed Rules Implementing the Blue Ribbon Committee's Recommendations on Improving the Effectiveness of Corporate Audit Committees
FILE NO. S7-22-99
Jonathon G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, D.C. 20549-0609
Dear Mr. Katz:
In response to the recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees, the SEC has proposed new rules designed to improve disclosure relating to the functioning of corporate audit committees and to enhance the reliability and credibility of financial statements of public companies. As the General Auditor reporting directly to the Audit Committee of TCF Financial Corporation, we have several concerns regarding the proposals. Our comments, concerns and suggestions follow below.
Recommendation 1 & 2; Independence:
We believe the board should be empowered and held accountable to determine which directors will serve the interests of the shareholders best. We believe provisions establishing mandatory board compensation dollar or percentage limitations and specific periods of former employment should be deleted. We believe that limiting compensation to a qualified retirement plan and payments for services provided as a member of the board are appropriate, but any specific dollar limitation would only deter those individuals who would be most qualified to serve. We believe this is particularly relevant in view of the significant time commitment required of audit committee members.
The Blue Ribbon Committee requires exceptions be disclosed in the proxy and the NYSE requires an annual written affirmation of compliance to all the independence rules. We believe disclosure is sufficient with any additional affirmation statements to be redundant and a disincentive to service.
Recommendation 3; Financial Literacy:
We support the need for "financial literacy" and "financial expertise", however, it is our suggestion that safe harbor language should be adopted or more detailed definitions be provided. Without this, an audit committee member would be subject to litigious claims beyond those of a board member, which is already substantial.
Recommendation 4; Audit Committee Charter:
We support this recommendation and the proposals.
Recommendation 5: Disclosure of Charter in the Proxy:
The SEC did not adopt the recommendation that the audit committees state in the proxy statement whether they have satisfied their responsibilities during the prior year in compliance to the charter, although they are seeking comment on this issue. We oppose affirmation and public disclosure of the charter because we believe it will increase frivolous strike suits. Disclosure will also result in boilerplate charters that provide little benefit to shareholders.
Recommendations 6 & 7; Outside Auditor Accountability & Communications:
The recommendations and proposed rules are similar to current practices, which we support.
Recommendation 8; Quality judgements of company's accounting principles:
We believe discussions regarding alternative practices are appropriate but are concerned that the rules could lead to a grading of GAAP practices. Thus, even if a company followed GAAP, a perceived lower grade exposes the audit committee to liability beyond those ever contemplated by GAAP. All GAAP is considered acceptable. We believe concerns for alternative GAAP practices should be resolved with those who promulgate GAAP. This appears to pass potential liability to a company's board of directors when management chooses to use alternative practices even when adequate justification exists for their use.
Recommendation 9; Audit Committee report to Shareholders & Form 10-K:
We do not support any requirement that an audit committee report on the "quality" of a company's financial statements or a belief that they are in accordance with GAAP. The proposed rules omit the express quality review and change the affirmation of GAAP financial statements to a negative assurance, akin to a "comfort letter," that nothing has come to the attention of the audit committee that would lead it to believe there were material misstatements or omissions in the company's financial statements. This proposal adds an obligation for disclosing omissions of material facts that may arise even in financial statements prepared with GAAP. For example, if alternative GAAP principles would result in material differences in financial reporting, would the audit committee be required to disclose the effect of the alternative presentations? This standard is likely to increase the liability risks of audit committee members, even with the proposed safe harbor. This would force audit committees in general to significantly increase their need for outside advice and counsel regarding their disclosure obligations. We also do not support any requirement for negative assurances.
Recommendation 10; SAS 71 Interim Reviews:
This is similar to current practices and we support the recommendation.
Norman G. Morrisson
Senior Vice President, General Auditor
TCF Financial Corporation