Association for Financial Professionals

November 29, 2002

Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549

Re: File No. S7-40-02

Dear Mr. Katz:

The Association for Financial Professionals (AFP) welcomes the opportunity to comment on the Securities and Exchange Commission's (SEC) proposed rule Disclosure Required by Sections 404, 406, and 407 of the Sarbanes-Oxley Act of 2002. The proposal requires a number of new disclosures related to management's assessment of internal controls, codes of ethics and financial experts on boards of directors' audit committees.

AFP generally supports the provisions of the SEC proposal. However, we are concerned about the volume and pace of proposed reporting and disclosure rules. We strongly recommend that the SEC follow closely the guidelines set in the Sarbanes-Oxley Act and not expand the level of disclosure beyond what the Act requires. For example, we strongly oppose any requirement that companies evaluate and report on internal controls on a quarterly basis, rather than on an annual basis. In addition, we believe that the definition of financial expert on an audit committee should not be restricted only to those who have experience preparing or auditing financial statements. The SEC should also consider a transition period for implementation of the financial expert rule.

The membership of AFP includes approximately 14,000 financial executives employed by over 5,000 corporations and other organizations. Our members represent a broad spectrum of financial disciplines; their organizations are drawn generally from the Fortune 1000 and middle-market companies in a wide variety of industries, including manufacturing, retail, energy, financial services, and technology.

Specified Rules of Sarbanes-Oxley Act

The Sarbanes-Oxley Act, overwhelmingly passed by the Congress, leaves implementation of its provisions to the SEC. However, in some areas, the legislation sets specific rules as to the timing and content of disclosures. We believe that in those areas, the SEC should not increase the number of required disclosures or accelerate the reporting dates. Going beyond the specific requirements of the Act will result in disclosure overload. Such overload will not benefit investors and analysts and will be very costly for companies to implement. It also will add significant demands on financial staffs that have been reduced industry-wide as a result of the slowing economy.

Management's Assessment of Internal Controls

The Act requires companies to annually assess and report on internal controls. This internal control report must include:

  • A statement of management's responsibilities for establishing and maintaining adequate internal control structure and procedures for financial reporting

  • Conclusions about the effectiveness of a company's internal controls and procedures for financial reporting based on management's evaluation of those controls and procedures, as of fiscal year end

  • A statement that the external auditor has attested to and reported on management's evaluation of the company's internal controls and procedures for financial reporting.

In the proposed rule, the SEC has gone beyond the Act and proposed that management evaluate the effectiveness of internal controls on a quarterly basis, within 90 days of filing the quarterly report on Form 10-Q. AFP strongly opposes this requirement because we believe that the design and operation of internal controls do not normally change within a year. Therefore, evaluating effectiveness of internal controls more frequently than annually would provide little or no benefit to users of financial statements. We recommend that the SEC implement the annual requirement as written in the Act, especially given the vast number of recent regulatory and reporting changes.

Disclosure of Financial Experts

The proposal requires companies to disclose:

  • Number and names of persons that the Board has determined to be financial experts on the audit committee, and

  • Whether the financial expert(s) are independent, and if not, an explanation of why they are not.

If the company does not have a financial expert on the audit committee, the company must disclose the fact and explain why. The proposed rules define a financial expert as a person with:

  • An understanding of generally accepted accounting principles (GAAP)

  • Experience applying GAAP in connection with estimates, accruals, and reserves with a company similar to the issuer company

  • Experience preparing or auditing financial statements comparable to the issuer

  • Experience with internal controls and procedures for financial reporting, and

  • An understanding of audit committee functions.

We agree that the attributes above are important for a financial expert. However, we question whether a financial expert must possess all of the attributes. Specifically, it may not be necessary for a financial expert to have direct experience preparing or auditing financial statements. For example, industry or company analysts should qualify as financial experts. Corporate executives that are responsible for developing or reviewing accounting and disclosures related to critical accounting policies and estimates, as well as financial officers on a company's SEC disclosure committee, should also qualify. Limiting the designation of a financial expert to those who have prepared or audited financial statements will exclude individuals who are qualified to serve and make this position difficult to fill, especially for smaller companies.

Finally, the SEC should consider a transition period for the financial expert. Companies need adequate time to assess the qualifications of their current audit committee members when the rules are finalized and time to recruit new members for their boards, if necessary. AFP recommends a minimum transition period of six to twelve months.

* * *

We commend the SEC for its efforts to implement Sarbanes-Oxley Act provisions and improve the quality of financial reporting by public companies. We appreciate the opportunity to comment on the proposed rule and urge your consideration of our recommendations. If you have any questions, please contact Gregory Fletcher, AFP's Director of Financial Accounting and Reporting, at (301) 961-8869.


Alvin C. Rodack, CCM
Associate Treasurer
The Ohio State University
AFP Government Relations Committee
James R. Haddad, CCM
Vice President, Corporate Finance
Cadence Design Systems, Inc.
AFP Financial Accounting and Investor
Relations (FAIR) Task Force