Transparency International-USA
The Coalition Against Corruption
1112 16th Street, N.W., Suite 500, Washington, D.C. 20036
Tel: 202-296-7730     Fax: 202-296-8125

May 28, 2003

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609

Commission File No. SR-NASD-2002-141
NASDAQ Corporate Governance Proposal
Release No. 34-47516

Dear Mr. Katz:

Transparency International-USA (TI-USA) applauds the efforts of the Securities and Exchange Commission (SEC) to improve the quality and transparency of disclosure. We also support the corporate governance proposals of the National Association of Securities Dealers, Inc, (NASD), through its subsidiary, The NASDAQ Stock Market, Inc. (NASDAQ), approved by the Board of Directors of the NASDAQ on July 24, 2002, and later amended and submitted to the SEC on March 11, 2003.

While we recognize that the deadline for comment on these proposals has passed, we nonetheless would like the staff to consider our comments. We would specifically like to direct your attention to the attached July 22, 2002 TI-USA statement on corporate governance and accounting reforms that relate to the corporate governance proposals of the NASDAQ Board of Directors, including certain enhancements which we believe would improve the effectiveness of the proposals.

Independence of Directors

The recommendations on independence would require that audit committee members receive only director's fees as compensation, in order to be considered "independent" for the purposes of audit committee composition. We do not believe there should be a difference in the independence criteria for audit committee members and other "independent" board or committee members. We believe this requirement should apply equally to the definition of independence for other board and committee members. While we concur that audit committee members have a particularly demanding role and responsibility, we believe that the requirement for independence is equally important to a member of the compensation committee or the nominating/corporate governance committee. For example, independence is equally important in order to properly perform the tasks of selecting, compensating and evaluating a CEO. The need for these committee members to be independent is no less than for audit committee members. Therefore, we recommend that, to meet the definition of independence for the purposes of board of director or committee qualification, director's fees should be the only compensation an individual may receive from the company.

Audit Committee Written Charter

We applaud the NASDAQ recommendation outlining the requirements for a written audit committee charter. However, we believe your recommendation should include a specific requirement that one of the audit committee's purposes must be to assist the board in the oversight of the company's compliance with legal and regulatory requirements. We believe it is important that the audit committee and/or the board of directors assume oversight of the company's compliance with laws and regulations and we support a requirement to disclose this responsibility in the audit committee charter. Such a requirement would be consistent with the NYSE recommendations on corporate governance.

Internal Audit Function

We note that the NASDAQ's current corporate governance proposals exclude a requirement that each listed company must have an internal audit function. We strongly support such a requirement and believe that an internal audit function should have a reporting channel directly to the audit committee or the board of directors. Such a requirement would also be consistent with the NYSE recommendations on corporate governance. Any rule should clarify what would constitute an internal audit function. The internal audit function is not the control process itself, but rather the process of evaluating the adequacy and effectiveness of controls, and monitoring compliance programs. The Institute of Internal Auditors defines internal auditing as "an independent, objective assurance and consulting activity designed to add value and improve an organization's operations.  It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes." In addition, TI-USA believes that monitoring compliance programs and ensuring the adequacy of internal controls should be among the internal audit functions responsibilities.

Code of Conduct

We also support the NASDAQ's separate proposal (SR-NASD-2002-139) that listed companies should adopt and publish a code of conduct for all directors, officers and employees and that waivers should be disclosed. The recommendation notes that the code must "contain an enforcement mechanism that ensures prompt and consistent enforcement of the code." TI-USA believes that compliance standards and procedures are critical to the effective implementation and operation of the code. To improve the effectiveness of this requirement, we recommend that the final rule require listed companies to publish a summary of the compliance processes in place to support the code, addressing such items as training, monitoring compliance, discipline, and evaluation of the effectiveness of processes. It is important to the effective operation of the code of conduct that procedures be incorporated that allow for proper implementation, communication, training, and monitoring/enforcement and that brief summary disclosure of these requirements will help ensure that these important processes are established. An example of such disclosure follows:

The company maintains a multi-faceted corporate compliance and ethics program that meets all applicable federal guidelines and industry standards. The program is designed to monitor and raise awareness of various regulatory issues among employees, to stress the importance of complying with all government laws and regulations and to promote the company's code of conduct. As part of the program, the company provides annual ethics and compliance training to every employee. The program encourages all employees to report any potential or perceived violations to a toll-free hotline.

We would be please to discuss the contents of our statement further at your convenience.

Very truly yours,

Fritz Heimann, Chairman,
Transparency International-USA
  Thomas L. Milan, Director,
Transparency International-USA

Transparency International-USA
The Coalition Against Corruption
1112 16th Street, N.W., Suite 500, Washington, D.C. 20036
Tel: 202-296-7730     Fax: 202-296-8125

TI-USA Statement on Corporate Governance and Accounting Reforms

Transparency International is an international anti-corruption organization headquartered in Berlin, Germany, with over 80 chapters promoting transparency and accountability in government and the private sector worldwide. In TI's view, US corporate governance and accounting scandals have impaired US leadership and raised questions about the US system as a model for disclosure and ethical business practices. They have made it more difficult for the United States to promote good governance internationally and serve as an excuse for countries resisting action to reform corporate governance and strengthen regulatory oversight.

Prompt, effective reform here at home is indispensable to US credibility abroad. The United States is setting an example by acknowledging weaknesses in its system. Adoption of needed reforms would serve as a model for similar reform efforts which are also needed in other countries.

The true test will be whether, over the next few months, the Administration, Congress, regulators, stock exchanges and key players in the private sector -- corporations, accountants, lawyers, securities analysts, underwriters and rating agencies -- actually take meaningful steps to strengthen integrity and accountability. Legislation is necessary for some aspects of reform, for example to ensure that the SEC has the appropriate legal basis to act. The Justice Department and SEC should forcefully prosecute offenders, and Congress should provide adequate resources for them to do so. At the same time, companies, listed and non-listed, must direct their efforts at ensuring an ethical corporate culture, going beyond the letter of the law and providing incentives that reward compliance, transparency and accountability.

From TI's perspective, it is essential for companies to have effective internal controls and for there to be strong, consistent international systems for corporate accounting and auditing. Transparency International-USA urges prompt action on the following:

Corporate Governance:

Companies should adopt effective corporate compliance programs, covering compliance with laws and regulations and with ethical standards. Such programs should have the active support and participation of senior management and be provided with adequate resources. Compliance programs should include training requirements, procedures for reporting illegal or unethical behavior, and strong monitoring and enforcement mechanisms.

Oversight over corporate compliance programs should be vested in an audit or governance committee comprised entirely of directors who are independent of management. This committee should have the requisite authority, expertise, time and support to carry out its mandate.

SEC should require companies to include in their annual reports an assessment by management, reviewed by the audit committee, of the adequacy of internal controls, including corporate compliance programs.

Companies should establish an internal audit function with a reporting channel directly to the audit committee. Among its responsibilities should be monitoring compliance programs and ensuring the adequacy of internal controls.

Accounting and Auditing:

SEC should require CEOs and CFOs to certify the accuracy of financial statements and disclosures in periodic reports. CEOs and CFOs should be subject to criminal penalties for misleading auditors or the public.

US generally accepted auditing standards should require auditors to treat a significant deficiency in corporate compliance processes as a matter reportable to the audit committee.

The audit committee should be comprised entirely of directors who are independent of management, and it should have the requisite authority, expertise, time and support to carry out its mandate. It should have sole responsibility for the selection of outside auditors, for their compensation, and for the scope of their duties; the auditors should report to the audit committee. The audit committee should ensure that auditors are independent and not impaired by conflicts of interest, including placing restrictions on hiring of external auditors by the company.

Congress should create an independently-funded public oversight board for the accounting profession, operating under the aegis of the SEC. The board should have confidentiality privilege and be protected against liability. It should have the power to set ethics standards and independence requirements, including conflict of interest rules, to conduct quality control reviews of firms, and to impose penalties. In addition, the public oversight board should have responsibility for setting auditing standards, which may be delegated to an expert body over which it has oversight.

FASB should be provided with independent funding and the ability to promptly bring rules up to date to respond to changing circumstances. Convergence to a stronger, internationally recognized set of accounting standards is essential. To that end, consideration should be given to achieving the best balance between the IASB principles-based approach and the US GAAP rules-based approach.

Fritz Heimann
  Nancy Zucker Boswell
Managing Director

July 22, 2002