Dear Chairmen Sarbanes and Oxley:
The Association for Financial Professionals (AFP) represents 14,000 financial professionals who are employed by over 5,000 corporations, including many in the Fortune 1000, in a wide range of industries. We would like to share our views on certain key provisions of the auditing and corporate reform legislation that is pending before the Conference Committee. We support many provisions of S. 2673, the Public Company Accounting Reform and Investor Protection Act, with a few noted exceptions, and urge prompt enactment of legislation.
Oversight Board
We support the mission and funding of the Public Company Accounting Oversight Board, as proposed by S. 2673. AFP believes that is important that there be one board that has the authority to inspect the work of audit firms, conduct investigations, take disciplinary action, and be responsible for independence, ethics, and audit standards of the audit profession. In addition, we support the provision that allows the oversight board to adopt, as its rules, statements of auditing standards issued by other professional groups. Such a provision will prevent duplication of effort and ensure that effective existing standards are maintained. However, it is our firm belief the oversight board will be strengthened and more effective in establishing standards if all members are required to have a comprehensive financial background.
Auditor Independence
A guiding principle for auditor independence is that the external audit firm should not rely on non-audit work that it performed for a client. AFP supports prohibiting auditors from performing the nine activities specified in S. 2673 (except for de minimus amounts) because engaging in those services would violate the guiding principle. In addition, we support allowing auditors to perform tax services for audit clients because providing such services would not compromise auditor independence. Also, prohibiting this work would be costly and counter-productive to goals of providing more timely information to investors.
We support the mandatory rotation of lead and review partners after five years on a client audit engagement because the rotation would ensure that the audit firm brings a different perspective periodically to the engagement and would reduce any appearance of conflict of interest. We believe that this practice is sufficient to maintain independence and would be superior to the costly, inefficient and ineffective practice of mandatory rotation of audit firms. We also support the one year "cooling off period" before an auditor could accept a job as chief executive officer, chief financial officer, controller or chief accounting officer at an audit client.
Audit Committees
AFP strongly supports independent and technically qualified audit committees. However, we have concerns that the standards in the proposed legislation need to be raised. AFP urges that a majority of audit committee members have experience preparing or auditing financial statements. We further urge that training on a company's operations, cash flows, critical accounting policies and industry benchmarks be required for all audit committee members.
Other Corporate Governance
Clear and effective corporate governance policies are essential to ensure that a company is managed ethically, responsibly, and in the interests of stakeholders. The proposed legislation provides such policies and AFP specifically supports a ban on loans to directors and officers (except for de minimus amounts), CEO and CFO certification of financial statements, limitations on director and officer stock sales during a pension lockout period and prompt reporting of stock sales by directors and officers (within seven calendar days). These changes will ensure that management's interests are aligned with those of employees, investors and other stakeholders.
However, we have concerns about the proposed requirement that CEOs, CFOs, and directors be required to return bonuses and proceeds from stock sales received in the 12 months preceding a bankruptcy. Such a provision greatly limits the ability to attract talent to a troubled company and will discourage people from joining a company that may face bankruptcy. The provision also does not recognize that bankruptcies are filed for a variety of reasons. Because of the detrimental effects on acquiring or retaining talented people at troubled companies, the provision as currently drafted would greatly diminish the chances of a company emerging from bankruptcy as a viable entity.
Enhanced Financial Disclosures
We support the enhanced disclosure of material off-balance sheet transactions and relationships with affiliated entities that may have a material or future effect on a company's results of operation, liquidity, capital expenditures, or cash flows. Such disclosure will greatly improve the transparency and quality of financial reports and enable investors and analysts to more accurately assess current and future cash flows of a company. Further, we agree that the responsibility for developing enhanced financial disclosures should reside with the Securities and Exchange Commission and the Financial Accounting Standards Board (FASB).
Other Provisions
We support the funding of FASB through fees assessed to public companies. This will reduce the appearance of the conflict of interest inherent in FASB's current dependence on companies that have a vested interest in FASB accounting standards. We also support the enforcement of penalties and prosecution of companies and individuals that commit fraud or other criminal acts. This will signal that individuals and companies will be held accountable for intentionally harming employees, investors, and stakeholders.
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AFP appreciates the opportunity to communicate our positions and hopes that you will consider them as you finalize this important auditing and corporate reform legislation. If you need any additional information, please contact Gregory Fletcher, AFP's Director of Financial Accounting and Reporting, at 301.961.8869.
Sincerely,
