November 27, 2002
Via E-mail (firstname.lastname@example.org)
Mr. Jonathan G. Katz
Re: Proposed Rule Regarding Section 407 of the Sarbanes-Oxley Act
Dear Mr. Katz:
The undersigned, General Counsels of eleven Midwest public companies, respectfully submit these comments to the Commission's proposed rule implementing the "financial expert" disclosure requirement of Section 407 of the Sarbanes-Oxley Act (the "Act"). As evidenced by this unified comment letter, we believe our concerns are commonly shared among many reporting companies. We urge you to address the following concerns raised by the proposed rule before issuing the rule in its final form.
Our primary concern is that the proposed definition of "financial expert" is too limiting and will substantially reduce the pool of qualified directors that could serve in that role on audit committees. Specifically, Instruction 1.c to new Item 309 of Regulation S-K would require a financial expert to have "experience preparing or auditing financial statements that present accounting issues that are generally comparable to those raised by the registrant's financial statements" (emphasis added). This attribute essentially limits the pool of eligible financial experts to current or former public accountants or senior financial officers of reporting companies. Given the increased compliance and financial reporting obligations on public companies, we believe that the number of current senior financial officers or public accountants with time available for audit committee service may be particularly limited.
We strongly believe that direct experience preparing or auditing financial statements of reporting companies should not be required for a director to be considered a financial expert under the Act. As stated by the Commission in the proposing release, "The role of the financial expert is to assist the audit committee in overseeing the audit process, not to audit the company." We firmly believe that directors can properly discharge this oversight function with experience reviewing or analyzing reporting company financial statements, even if such directors have not themselves prepared or audited financial statements. For example, current or former chief executive and chief operating officers of reporting companies with financial oversight responsibilities, fund managers who have spent significant time analyzing the financial statements of companies in which their funds have invested or may invest and directors with significant audit committee experience should qualify as financial experts. In fact, given the rapidly changing financial reporting and disclosure landscape, such persons may be better qualified from a current financial knowledge standpoint to serve as audit committee financial experts than retired CFO's and CPA's.
Moreover, in seeking out qualified director candidates, our companies look for individuals possessing broad skill sets. Financial acumen, while critical to the audit committee function, is only one of many skills sought in director candidates. In selecting board candidates, we also look for attributes such as industry experience, public company board experience and operations and senior management experience. We note that the proposed rules of the NYSE and NASDAQ governing audit committees recognize the right of audit committees to retain independent experts and advisors. In instances where an audit committee might benefit from specific expertise in preparing and auditing financial statements, we assume that audit committee members could readily avail themselves of independent experts and other advisors with the relevant expertise. For the foregoing reasons, we respectfully request that the financial expert definition be modified in the final rule to make it clear that experience reviewing or analyzing a reporting company's financial statements is sufficient to support a financial expert determination.
Of secondary concern is the Commission's desire to require disclosure of the number of financial experts serving on a company's audit committee. The Act requires that a reporting company disclose that it has a financial expert on its audit committee and, if not, why not. We believe that the interests of investors are adequately served by a confirmation that an audit committee includes a financial expert. We are concerned that requiring disclosure of the exact number of financial experts may cause some reporting companies to stack the deck in favor of directors who satisfy the financial expert definition in order to try to set themselves apart from their peers. This could lead to an incorrect market perception, particularly in light of the proliferation of corporate rating products that have materialized recently, that companies with a greater number of "financial experts" are superior to competitors with more diverse board members. It could also shift the focus of director searches towards accounting professionals and away from candidates with wide-ranging skill sets who can serve reporting companies on a more comprehensive basis. We respectfully request that this aspect of the disclosure, which goes beyond the requirements of the Act, be eliminated from the final rule.
If you have any questions regarding our concerns, please feel free to call any of the undersigned. Thank you for your consideration.