Maine Bankers Association
November 22, 2002
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. S7-40-02
Dear Mr. Katz:
On behalf of the members of the Maine Bankers Association, I appreciate the opportunity to respond to the proposed rules regarding Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002 (the Bill).
The Maine Bankers Association, an affiliate of the American Bankers Association, represents 25 member banks and trust companies serving the citizens of the State of Maine. Thirteen of our members are considered community banks and six of those members are considered an "issuer" pursuant to Section 13(a) or 15(d) of the Exchange Act. An additional non-member, Maine-based bank is also an issuer.
The Maine Bankers Association and its members commend Congress and the President for enacting the Bill which enhances sweeping corporate disclosure and financial disclosure reform. We are in substantial agreement with the Commission's proposals for Sections 404 and 406 and limit our response to Section 407.
We have chosen to respond to your specific requests for comments. However, as you will read, our major concern is including in the definition of Financial Expert, the need to have experience in: "(a) the preparation or auditing of financial statements of generally comparable issuers; and (b) the application of such principles in connection with the accounting for estimates, accruals, and reserves." We assume an "issuer" for purposes of this definition would be a Company filing reports pursuant to Section 13(a) or 15(d) of the Exchange Act.
Comments on Section 407:
1. Proposed Definition of "Financial Expert"
Do the five attributes adequately describe the qualities that a financial expert should have? Should we add any attributes?
- Should we modify the proposed definition of "financial expert" in any way? If so, how?
We strongly believe the definition of "financial expert" should be modified. A strict reading of the proposed definition would make it extremely unlikely that a financial expert, willing to serve on the Audit Committees of our registrant members, could be identified within the Companies' service areas, or in the entire State of Maine. The most likely candidates meeting the definition would be expensive, professional Board members from other regions of the United States. Our recommendations for change are within the answers to the following bulleted questions.
- Should we require a financial expert to have direct experience preparing or auditing financial statements of reporting companies? Should experience reviewing or analyzing such financial statements suffice? If so, why?
- Should a financial expert have to possess all of the "attributes" listed in the proposed definition? Should we broaden the scope of individuals who may qualify as such an expert?
- An understanding of generally accepted accounting principles and financial statements;
- Experience applying such generally accepted accounting principles in connection with the accounting for estimates, accruals, and reserves that are generally comparable to the estimates, accruals and reserves, if any, used in the registrant's financial statements;
- Experience preparing or auditing financial statements that present accounting issues that are generally comparable to those raised by the registrant's financial statements;
- Experience with internal controls and procedures for financial reporting; and
- An understanding of audit committee functions.
These attributes do not need to be achieved through direct experience with financial statements and disclosures of a registrant in the same industry.
We believe the SEC should not require a financial expert on the audit committee of a mid-sized community financial institution to have direct experience preparing or auditing financial statements of reporting companies. The banking industry is highly regulated by state and federal examiners. Because of this, in addition to experience reviewing or analyzing such financial statements, the attributes could be acquired as follows:
- Acquire annual continuing professional education in Regulation S-K and financial service industry specific GAAP reporting matters.
- Have direct access to outside resources to advise on emerging and other technical and reporting issues.
- Have at least two years' experience on the audit committee of a registrant in the same industry with similar reporting requirements.
The scope should not be broadened.
We note that the five "attributes" do not include direct experience with financial statements and disclosures of a registrant in the same industry. The phrase "generally comparable" is used in subparagraphs 2(b) and (c) concerning experience. We recommend that the five attributes, as stated, should be applied in place of the definition of "Financial Expert" in Item 2, Proposed Definition of "Financial Expert," sub section 2, "Experience in: (a) the preparation or auditing of financial statements of generally comparable issuers; and (b) the application of such principles in connection with the accounting for estimates, accruals, and reserves."
Thank you again for allowing us the opportunity to respond to Proposed Rule: Disclosure Required by Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002. Please feel free to contact me with any other questions at (207) 622-6131.
Joseph J. Pietroski, Jr.
Maine Bankers Association