Council of Institutional Investors

January 10, 2003

Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 5^th Street N.W.
Washington, DC 20549-6009

Re: File No. S7-49-02

Dear Mr. Katz:

The Council of Institutional Investors, an association of more than 130 public, corporate and union pension funds with over $3 trillion in investments, supports the Securities and Exchange Commission's proposal to further restrict the services auditors may provide to audit clients, require audit committee approval of auditor services and further enhance the audit-fee disclosures provided to investors. The SEC's proposal is largely consistent with the Council's policy (attached) on auditor independence. Since the Council doesn't have a policy on audit partner rotation or compensation issues, we are not commenting on these aspects of the proposal.

A few changes would improve the proposed rule and result in stronger protections for investors. First, the Council does not endorse exempting foreign auditors from the rules. Since foreign auditors now audit about one out of every ten public companies, such an exemption creates a loophole that will only increase in size and potentially harm investors.

Second, Council policies call on audit committees to establish and disclose an auditor independence policy and to pre-approve all non-audit services exceeding a de minimis amount of $50,000. We do not agree that pre-approval should no longer be necessary if audit committees adopt a policy on non-audit services. Such an exemption, which we believe is inconsistent with the Sarbanes-Oxley Act, may weaken audit committee oversight and may harm investors.

Third, the Council suggests that attest service fees be listed separately and not included in the audit fees. We believe such disclosure ensures that shareholders are aware of fees paid for the actual audit and of all other fees paid to the auditors.

Audited financial statements are one of the primary sources of information available to guide and monitor Council members' investment decisions. The integrity of these statements and the accountants responsible for preparing them is critical to Council members and their millions of pension system participants and beneficiaries.

Investors depend on truly independent, disinterested outside auditors to stand as a critical defense against fraudulent or otherwise flawed financial statements. Just as Council members believe that an independent director's only nontrivial connection to the company should be that person's directorship, they believe that an independent auditor's only nontrivial connection to a company should be its audit services.

To ensure that the professional independence of outside auditors-or at the very least, the appearance of their independence-is not threatened by conflicts of interest arising from non-audit relationships, Council members believe that auditors should be prohibited from providing nearly all non-audit services to their audit clients. Members also believe that information about fees paid to auditors, categorized by types of services, should be disclosed to shareholders.

In general, the Council believes the proposed restrictions will benefit investors by ensuring that truly independent, outside auditors provide objective evaluations of corporate financial statements.

Please contact me with any questions.

Sincerely,

Sarah A.B. Teslik
Executive Director

cc: SEC Chairman Harvey L. Pitt
SEC Commissioner Paul Atkins
SEC Commissioner Roel Campos
SEC Commissioner Cynthia Glassman
SEC Commissioner Harvey Goldschmid

Council of Institutional Investors
Auditor Independence Policy

1. An external auditor should not perform any non-audit services for its audit clients, except:

   • services that are required by statute or regulation to be performed by a company's external auditor, such as attest services,

   • services related to tax return preparation, provided that such services should not include (a) the provision of advice regarding the structuring or any transaction, (b) serving as the company's advocate or representative in the tax audit process, (c) unless, however, these services are in connection with acquisitions or divestitures of company subsidiaries or businesses

   • accounting and tax services provided in connection with an acquisition or divestiture

2. Under no circumstances should a company's external auditor provide:

   • non-audit services currently prohibited by SEC regulation

   • financial information systems design or implementation services

   • internal audit consulting services

   • management consulting services

3. To ensure that the provision of permitted non-audit services does not compromise the external auditor's independence, a company's management and the audit committee of the board of directors should formulate an auditor independence policy; compliance should be monitored by the board of directors.

4. The audit committee should be composed exclusively of directors who are independent under the definition set forth in the Council's Core Policies and Principles and its pre-approval should be required for any contract for non-audit services in excess of $50,000 to be entered into with the company's external auditor.

5. To permit shareholders to monitor the provision of non-audit services, the company should disclose in its proxy statement the auditor independence policy and the fees paid by the company for each category of non-audit services. The proxy statement should also include a copy of the audit committee charter, contain a statement by the audit committee that it has complied with the duties outlined in the charter, confirm that the audit committee pre-approved contracts for non-audit services as described above, and contain a statement by the audit committee that it believes that the external auditor's independence has not been impaired by the audit firm's provision of permitted non-audit services.

6. In engaging the external auditor's services, the audit committee or the full board, not the company, should be designated as the auditor's client. The full board or the audit committee should seek competitive bids for the external audit engagement no less frequently than every five years.