November 26, 2002
By e-mail: firstname.lastname@example.org
Mr. Jonathan G. Katz, Secretary
Re: Comments of Alcoa on File No. S7-40-02
Dear Mr. Katz:
This letter responds to the request of the U.S. Securities and Exchange Commission (the "Commission") for comments regarding its proposed rule defining "financial expert" under Section 407 of the Sarbanes-Oxley Act of 2002.
Alcoa supports recent initiatives to strengthen corporate governance practices. However, we are concerned that the proposed rule defining "financial expert" under Section 407 of the Sarbanes-Oxley Act does not enhance the oversight function of the audit committee.
We agree with the Commission's statement that the "role of the financial expert is to assist the audit committee in overseeing the audit process, not to audit the company." We believe the audit committee's function is not to replace the company's management, internal auditors and outside auditors, but rather one of oversight. It is the responsibility of the company's management to prepare the company's financial statements and to develop and maintain adequate systems of internal accounting and financial controls, and it is the internal and outside auditors' responsibility to review, and when appropriate, audit these financial statements and internal controls. Financial managers and the internal and outside auditors have more knowledge and information about the company than do audit committee members. Consequently, in carrying out its oversight responsibilities, the audit committee cannot provide any expert or special assurance as to the company's financial statements or internal controls or any professional certification as to the outside auditors' work.
It is our view that if difficult accounting or disclosure issues arise, the audit committee can most effectively carry out its oversight responsibilities by retaining appropriate outside advisors who possess the technical expertise necessary to assist in addressing and resolving any such issues.
No financial expert serving on an audit committee can ensure the integrity of a company's financial statements-no matter how impressive the expert's qualifications. An unduly restrictive definition of "financial expert" burdens reporting companies without adding any real value to investors.
We therefore recommend that the Commission replace its list of mandatory financial expertise attributes with a more flexible standard that will allow boards to consider candidates with supervisory and other relevant experience. In particular, direct experience preparing or auditing financial statements of reporting companies should not be required. Experience reviewing or analyzing financial statements, such as that obtained while serving as a chief executive officer (or in some other senior supervisory role) is more relevant to fulfilling the oversight responsibilities of an audit committee member than direct experience preparing or auditing financial statements.
In addition, we recommend that the Commission clarify that experience in the same industry as the company is not required. We believe there would be significant competitive and antitrust issues if that were a requirement.
Finally, we support the Commission's statement that the "mere designation of the financial expert should not impose a higher degree of individual responsibility or obligation on a member of the audit committee." We would encourage the Commission to specifically address the issue of the degree of individual responsibility, obligation or liability under state or federal law of a person designated as a financial expert. A financial expert should have no higher degree of responsibility, obligation or liability under state or federal law than any other member of the board. Any other rule would make it difficult, if not impossible, to recruit and retain financial experts for service on the audit committee.
On a related matter, with regard to the Commission's question whether the name of a financial expert on the audit committee be disclosed, we believe that the name of a financial expert should not be disclosed because it would discourage people from serving on an audit committee.
Thank you for your consideration of the foregoing.