Please find attached:
My company's extensive research has shown that poor Internal Controls and Ethics training are not the solutions to the current Investor Confidence Crisis in the United States. The Sarbanes-Oxley Act of 2002 is a SMALL firststep in the right direction. The Act as written needs "more" to begin the slow healing process of restoring investor confidence. The "more" is broadening it to include Business Controls and not just Internal Controls. The "more" is not placing a lot of reliance on Codes of Ethics. Since Ethics don't work in other aspects of society, why should we expect them to work in financial reporting?. To that end, efficient and effective Business Controls can complement the reliance on Ethics.
My partner and I would like to have a more in-depth discussion with you and your colleagues concerning using our research and techniques to restore investor confidence in American businesses.
Thank you for the opportunity to comment on Sections 404, 406 and 407.
Robert J. Stuckey
Attachment A: Disclosure Required by Sections 404, 406 and 407 of the Sarbanes-Oxley Act of 2002 (S7-40-02)
Assessment, Consulting, Training, Implementation
Disclosure Required by Sections 404, 406, and 407 of the Sarbanes-Oxley Act of 2002 [Release Nos. 33-8138; 34-46701; IC-25775; File No. S7-40-02]
March 10, 2003
Request for Comment
Would investors benefit from disclosure of the number of the financial experts serving on the company's audit committee? Or would it suffice to require disclosure only of whether at least one financial expert serves on the audit committee?
Comment - Yes. Investors would benefit knowing the number of financial experts serving on the audit committee. Given the specialized knowledge and experience basis for being a financial expert, investors will be able to gauge whether or not they feel the number of financial experts are adequate for the complexity of the business.
Do investors need to know the names of the financial experts on the audit committee? Would disclosure of the names discourage people from serving as financial experts on an audit committee?
Comment - Investors have the right to know who specifically is being relied upon to give financial expert advise. Since other Board members' professional credentials are identified, so too should the financial experts'. Disclosure of the names should not discourage capable members from being identified as financial experts.
Should the Commission 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 as a result of the designation? If the Commission should address this issue, how should it do so?
Comment - Without knowing the extent of the individual responsibility, obligation, or liability of the financial expert(s), the investing public will not have any means to evaluate exactly the corresponding expectations and performance of the financial expert. There should be specific responsibilities spelled out in the rules issued by the Office of Rule Making.
Should we use a term other than "financial expert"? For example, would the term "audit committee financial expert" be a more appropriate title?
Comment - "Financial expert" is an adequate designation. Adding "audit committee" does not increase clarity.
Is there other relevant information about the financial expert or experts that a company should have to disclose? For example, should we expand the disclosure required under Item 401(e) of Regulations S-K and S-B, as it relates to directors that the company has determined to be financial experts? If so, how?
Comment - No additional information needs to be disclosed as long as the definition of the "financial expert" is clear.
Should we require disclosure of whether the financial experts are independent, as proposed? If so, should we define "independent" in the same manner as the term is used in Section 10A(m)(3) of the Exchange Act?
Comment - The disclosure for the financial expert to be independent is absolutely necessary. The definition of "independent" should be defined in the same manner as the term used in Section 10A(m)(3) of the Exchange Act.
Should we incorporate an independence requirement into the definition of "financial expert" so that any designated financial expert must be independent to qualify under the definition?
Comment - An independence requirement must be incorporated into the definition of "financial expert." "Independence" is the cornerstone of unbiased objectivity.
Should we modify the proposed definition of "financial expert" in any way? If so, how?
Comment - Yes. The proposed definition should be broadened to require Business Control experience because there is a much greater impact to financial reporting than just internal controls. Business controls refer to the entire range of control processes, not only within the individual organization, but throughout the entire collaborative enterprise. Accurate and adequate financial reporting requires efficient and effective Business Controls.
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?
Comment - The lack of direct experience in preparing/auditing and reviewing financial statements of reporting companies seriously limits the effectiveness of a financial expert's opinion from a practical, realistic standpoint. While it is necessary to be well-grounded in theory, this theoretical understanding must be coupled with application experience.
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?
Comment - All the attributes listed in the proposed definition are adequate. Broadening the scope may seriously limit available candidates and restrict the diversity of knowledge brought to the board.
Do the five attributes adequately describe the qualities that a financial expert should have? Should we add any attributes?
Comment - The five attributes adequately describe the qualities of a financial expert.
Although we do not intend for the list of factors that a company should consider in assessing a potential financial expert's qualifications to be exhaustive, should we add any factors to the list? If so, what other factors should we include? Conversely, should we delete any proposed factors from the list? If so, which factors should we delete?
Comment - Industry experience would be beneficial from a practical standpoint. Familiarity with jargon, processes, and the technology, for example, would enable the financial expert to focus on content immediately.
Should the proposed rules provide for a different standard or methodology for assessing a financial expert's qualifications? If so, describe the preferred standard or methodology.
Comment - The proposed rules provide an adequate standard or methology for assessing a financial expert's qualifications.
Will investors find this information useful? Is there more useful information on how financial experts are determined?
Comment - A clear, concise definition of both the methodology and qualifications will assist the investors' assessment of the financial expert's capabilities.
Should our rules require the company to disclose the persons who are responsible for making the financial expert determination on behalf of the company? Is the board of directors the appropriate body to make such determination?
Comment - The Board of Directors is the appropriate body to make such a determination as long as the methodology and qualifications are clearly defined.
Should we create a bright-line test for the definition of "financial expert"? If so, what should the test be?
Comment - Bright-line tests are required for health professionals. Protecting the health of businesses is similarly critical to the Financial health of the economy and investors.
Should we also require the proposed financial expert disclosure to appear in the company's proxy or information statement? Is this information relevant to a security holder's decision to vote for a particular director or to elect, approve or ratify the choice of an independent public accountant?
Comment - Yes. Disclosure of the financial expert should appear in the proxy and/or information statement because this information is relevant.
Should we require the company to also disclose this information in its quarterly reports?
Comment - Quarterly disclosures are only necessary if there are changes from the previous quarter.
Should we also require such disclosure in registration statements filed under the Securities Act?
Comment - Yes. There should be disclosure in registration statements filed under the Securities Act.
Should the company have to disclose specifically the arrival or departure of a financial expert promptly after the occurrence of the event? If so, should we modify our Form 8-K proposed item regarding the arrival and departure of a director to also require a company to disclose whether the departing director was, or arriving director will be, a financial expert serving on the company's audit committee? Should a company make appropriate disclosures if: a financial expert leaves the audit committee, but remains on the board of directors; or an existing director joins the audit committee as a financial expert? Should a company only have to file a Form 8-K if it previously disclosed in its annual report that it had a financial expert and now has none?
Comment - The importance of the financial expert status should be reported in all the above questions.
A company currently may not have an audit committee member who qualifies as a financial expert under the proposed definition but may intend to seek one. In such a case, the proposed rules would require a company to disclose that it does not have a financial expert on its audit committee. However, the company could explain that it is searching for a qualified individual to serve on its audit committee. Should we provide companies with a transition period to find such a person? If so, what would be an appropriate transition period?
Comment - A transition period to the end of 2003 should be granted.
Should the definition of "financial expert" be modified for investment companies? Are the factors that are relevant in determining whether someone is a "financial expert" different for investment companies?
Comment - The definition of `financial expert" should be the same as for operating companies.
What definition of "independence" should the disclosure requirements apply with respect to financial experts? Should the definition incorporate the criteria set forth in Section 10A(m)(3)(B)(i) of the Exchange Act and Section 2(a)(19) of the Investment Company Act, as proposed, or a different test, for example, the test used for operating companies?
Comment - The definition of `financial expert" should be the same as for operating companies
Should disclosure with respect to financial experts on an investment company's audit committee be required annually, as proposed? Should this disclosure be required on each report on Form N-CSR or N-SAR, i.e., semi-annually?
Comment - Disclosure should be required on each report semi-annually.
For investment companies that would be required to file reports on proposed Form N-CSR, should the financial experts disclosure be required on Form N-CSR or Form N-SAR? Should small business investment companies, which otherwise would not be required to file proposed Form N-CSR, be required to use Form N-CSR for this purpose?
Comment - Investment companies should be required to file reports on Form N-CSR, and the financial experts disclosure should also be required on Form N-CSR. Small businesses should be required to use Form N-CSR for this purpose.
Should the rules address whether a company has a code of ethics that applies to its principal executive officer, as proposed, or should the rules track the language of Section 406 of the Sarbanes-Oxley Act and require a company only to disclose whether it has a code of ethics that applies to its senior financial officers?
Comment - The language in Section 406 is weak and essentially ineffective. The rules should address a code of ethics for the entire organization. Applying the code of ethics to just the executive officers or the senior financial officers is inadequate. Establishing the ethics of an entire organization is the only way to set expectations and subsequent enforcement with penalties for the entire organization.
Should we expand the definition of "code of ethics," as proposed, or should the definition adhere to the language in Section 406(c) of the Sarbanes-Oxley Act? Are there other ethical principles that should be included in the definition?
Comment - The definition is adequate.
Should the rules cover a broader group of officers? If so, which group of officers should they cover? Should the general counsel be covered? Should all executive officers be covered?
Comment - All executives along with the entire organization should be covered by the code of ethics. Without including the entire organization, there is a serious weakness across the entire workforce as to what is expected.
Should the proposed rules require a company to disclose whether it has a code of ethics that applies to its directors? Do most companies have a code of ethics that applies to the board of directors? Does the same code of ethics generally apply to the company's executive officers and its directors?
Comment - If the code of ethics is for separate groups, then that should be disclosed. The board of directors should also come under the same code of ethics. Ethical conduct should not be either a mystery or be segregated to specific workgroups. If, for example, a board member does not agree with an ethical principal in the company's code of ethics, then he or she should resign from the board.
Should we require the company to describe its procedures to ensure compliance with the code of ethics?
Comment - A description of a company's procedures to ensure compliance with the code of ethics should be readily available to its investors and potential investors. There should not be any hidden secrets regarding how a company upholds its code of ethics.
Should we require the company to describe its procedures for granting a waiver from a provision of its code of ethics?
Comment - A company should describe its procedures for granting a wavier from a provision of its code of ethics so that an individual investor can determine whether or not they would invest in the company. Again, there must be full disclosure and no secrets.
Should we require the company to disclose the date of adoption of its code of ethics and the date of the most recent update or the company's frequency of review of the code?
Comment - The company should disclose the date of adoption of its code of ethic, the date of the most recent update, and the company's frequency of review of the code.
Should the company have to file the code of ethics as an exhibit to its annual report as proposed? If not, should we also require the company to describe the principal topics that the code addresses?
Comment - The company needs to provide the principal topics of the code of ethics as an exhibit to its annual report. The entire code of ethics needs to be made available to the general public throughout the year.
Should we require disclosure regarding the existence of a code of ethics in our other reports and registration statements, including our Securities Act and Exchange Act registration statements?
Comment - The company should be required to disclose the existence of a code of ethics in other reports and registration statements, including the Securities Act and Exchange Act registration statements.
Should we require a company to also provide the proposed code of ethics disclosure in its quarterly reports? Should such disclosure be made in a company's proxy and information statements? Should it be disclosed in Securities Act registration statements?
Comment - Disclosure of the topics the code of ethics encompasses should be mentioned in quarterly reports along with the company's proxy, information statements, and in the Securities Act registration statements.
Should the requirement apply to foreign private issuers, as proposed? If not, why?
Comment - Foreign private issues also should have to abide by the rules of the Sarbanes-Oxley Act. As an analogy, foreign airlines have to comply with FAA rules in order to land in the U.S. Likewise, foreign pharmaceutical makers have to comply with FDA regulations in order to sell their products in the US.
Are there any privacy concerns that we should consider that would warrant narrowing the disclosure requirements regarding a grant of a waiver from the code?
Comment - Ethical principals are not trade secrets. They do not divulge proprietary information. There should not be privacy concern exemptions around disclosure.
Is a "waiver" a sufficiently distinct and formal event that the obligation to disclose will not present any difficulties of interpretation? Should we modify the requirement to ensure that "de facto, post hoc" waivers of codes-granted or acceded to after the occurrence of the "violation" are reported?
Comment - The investing public will decide if a violation is tolerable in light of specific circumstances. Not reporting through a waiver places a "cloud of suspicion" over what is being hidden from the investing public.
Should companies that use the Internet for these disclosures also be required to have technology that allows investors to be notified by e-mail when new information is posted to the Web site?
Comment - Yes. The Internet should be used to keep investors informed of the conditions surrounding their investment. The Internet provides speed in disbursement of information. An "opt-out" e-mail information offer or posted reviewable information can be made to all investors.
Should we require the filing of a Form 8-K regardless of whether a company provides the proposed disclosure on its Web site? Do investors need access to this information for longer than 12 months? How can we permit Internet disclosure and maintain a lasting public record of the information?
Comment - Filing of a Form 8-K should be continued regardless of whether a company uses the Internet as another medium to distribute information. Investors do need access to Form 8-K information for a period longer than 12 months. In order to maintain a lasting public record, printed copies of what was published on the Internet can be maintained similar to how paper originals are maintained today.
Should we specify where and how this disclosure should appear on a company's website if the company opts for the website method of dissemination?
Comment - Web site design varies with each company. However, a common format is for a "Home Page." Reference and access to the code of ethics should be provided from a link on the Home Page.
Are there other means of electronic dissemination that our proposed rules should permit?
Comment - As technology now stands, the Internet is truly ubiquitous and possesses the speed to make it more timely than traditional mailing methods. Other methods such as fax-back systems or downloadable PDF files could also be used to disseminate information.
Should we require a company choosing to disclose information about ethics code changes or waivers through its Internet website to provide advance notice in the company's annual report of its intent to satisfy the disclosure requirements in this manner, as proposed?
Comment - Yes. If a company is going to utilize its Internet Web site to disclose its code of ethics and any changes to it, then it should describe that in its annual report.
Should we require all Exchange Act reporting companies to disclose their website addresses? If so, should we specify the location of this disclosure? For example, should it have to appear on the front cover of all periodic and current reports, along with the company's street address? Should a company have to disclose its website address in, or on the front cover of, all of its Exchange reports? Proxy and information statements? Exchange Act registration statements? Securities Act registration statements?
Comment - Yes. If a company is going to utilize its Internet Web site to disclose its code of ethics and any changes to it, then it should include its Internet address on all reports and correspondence as it does with its physical address and phone number.
Should we require foreign private issuers to file disclosure about ethics code changes and waivers within two days under cover of Form 6-K? Should we otherwise require a foreign private issuer to promptly disclose ethics code changes and waivers?
Comment - Code of Ethics disclosure rules for foreign private issuers should be the same as U.S. companies.
Is the proposed definition of a code of ethics appropriate? Are there any modifications that should be made to this definition in the case of investment companies?
Comment - The proposed definition of the code of ethics is appropriate. No modifications should be made for investment companies
Do the proposed code of ethics disclosure requirements cover the appropriate entities, in addition to the registered investment company itself? Should any entities be removed, or should other entities (e.g., the administrator) be added?
Comment - The proposed code of ethics disclosure requirements cover the appropriate entities in addition to the registered investment companies. The Administrator should be added.
Do the code of ethics disclosure requirements cover the appropriate individuals at those entities? Should any of these individuals be removed, or should other individuals be added?
Comment - All employees, both permanent and temporary, should be covered by the code of ethics requirements.
Should we require registered investment companies, like domestic operating companies, to use Form 8-K to disclose amendments to, or waivers of, a code of ethics within two business days? Or is our proposed approach of requiring periodic reporting of this information on Form N-CSR or Form N-SAR appropriate? Should we propose a separate form for prompt reporting of this information? If we require periodic reporting of amendments and waivers on Forms N-CSR and N-SAR, is the proposed alternative option for disclosure of amendments and waivers on the investment company's Internet website within two business days necessary or appropriate?
Comment - Investment companies should have the same time constraint as operating companies.
For what period of time should we require an investment company to retain information about amendments to, or waivers from, codes of ethics, if it elects to post this information on its website? Should the retention period be not less than six years from the end of the fiscal year in which the amendment or waiver occurred, which would be consistent with the standard retention period for investment company records, or should it be some other period?
Comment - Investment companies should be treated no differently than all operating companies.
Should we propose a definition of internal controls and procedures for financial reporting? If so, is the proposed definition appropriate?
Comment - Yes. A different definition should be used. This definition should be for "business controls" not just "internal controls." Business control is the summation of all controls, including financial controls, under which the business operates. The effectiveness of all the controls ultimately determines the accuracy and adequacy of financial reporting.
Should we define the term using AICPA's Codification of Statements on Auditing Standards Section 319 definition? If not, are there any other definitions we should use?
Comment - Yes. The terms need to be modernized and expanded to include the implications of conducting business in the 21st century.
Should we propose specific disclosure criteria and standards for the management report? If so, what disclosure criteria and standards should we consider?
Comment - Yes. The BizControl Solutions 25 Best Practices as shown in the attachment should be the criteria and standards for the management report.
If we adopt the proposed amendments before the PCAOB is operational, should we delay effectiveness of the rules until such time as attestation engagements standards are issued or adopted by the PCAOB?
Comment - No delay should be scheduled. Future changes from the PCAOB will be made as appropriate. As business changes so will the PCAOB's pronouncements.
Should the company have to file the attestation report as part of the annual report? If so, should the report have to appear in a particular part of the annual report? Where?
Comment - Yes. The company should have to file the attestation report as part of the annual report. What is accomplished if the company does not file the attestation report? The investing public needs to know that the company is paying attention to the details. While attestation is not a guarantee, at least the Senior Management and the Board will be forced to decide how much attention they want to give to actively managing controls BEFORE they sign the attestation.
Should we propose changes to Exchange Act Rules 13a-14, 13a-15, 15d-14 and 15d-15 to require periodic evaluations of both the company's disclosure controls and procedures and its internal controls and procedures for financial reporting?
Comment - Business processes have and will continue to change. Therefore, periodic evaluations are a must to keep abreast of changing conditions.
Should any rules regarding internal controls and procedures for financial reporting be applied to registered investment companies? If so, which specific rules and procedures should apply?
Comment - Investment companies should be treated no differently than all operating companies.
When we adopted the certification rules implementing Section 302 of the Sarbanes-Oxley Act, we stated that a single evaluation of the effectiveness of the disclosure controls and procedures for a series fund or family of investment companies could be used in multiple certifications for the funds in the series or family, as long as the evaluation had been performed within 90 days of the date of the certified report. What is the effect of today's proposed changes requiring that the evaluation be as of the end of the period covered by the report on the ability to use a single evaluation for a series fund or family of investment companies where the funds have different fiscal years? Should we adopt the approach of today's proposal, retain the approach that we previously adopted, or adopt a different approach?
Comment - Assessments on each fund should be done independently to accommodate multiple certifications. Attempting to "bundle" assessments is both ineffective and dangerous because a blanket certification is not adequate enough for large investment companies. Systems and processes can breakdown and different people potentially have different motivations to deceive.
What transition period do companies and registered public accounting firms need to prepare to perform these undertakings? Is the compliance date we propose adequate? If not, what date should we adopt?
Comment - Prolonging the transition period will only delay the investment public's acceptance of the perception of "being in control." Giving the companies an option on the effective date is dodging the issue that a fix is needed immediately. Furthermore, stating that the adoption should wait until the company has had a chance to perform a comprehensive evaluation strongly suggests that the companies are not presently been performing ongoing, comprehensive evaluations.
16457 Wilson Farm, Chesterfield, Missouri 63005-4525
Attachment 2: Supporting Documentation: Whitepaper Getting Control of Your Business (http://www.biz-control.biz/p-getcon.htm)
Attachment 3: Supporting Documentation: Whitepaper Best Practices to Establish Business Control (http://www.biz-control.biz/p-pract.htm)
Attachment 4: Supporting Documentation: Whitepaper Ethics -- The Incomplete Solution (http://www.biz-control.biz/p-nothcs.htm)