Letter to the SEC Supporting Proposal S7-49-02, Strengthening the Commission's Requirements, dated January 9, 2003
The Honorable Jonathan Katz
Secretary of Commission
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Dear Secretary Katz:
On behalf of the 1.4 million active and 400,000 retired members of the International Brotherhood of Teamsters (IBT), I am pleased to comment on File Number S7-49-02, “Strengthening the Commissions Requirements Regarding Auditor Independence.” The Teamsters Union, which has pension and health and welfare benefit trusts totaling over $100 billion, is a large investor in the equity market. As shareholders, we want to make sure that our investment decisions are based on accurate corporate information that is independently audited and certified.
We are pleased that in the wake of corporate debacles such as Enron, Worldcom, Tyco, and ImClone, the Securities and Exchange Commission (SEC) is stepping up efforts to protect investors. Strengthening the Commission’s requirements regarding auditor independence will untangle conflicts of interest that have undermined shareholder interests and will help restore investor confidence in the equity market.
The SEC has an opportunity to adopt true reforms because there is finally a legislative mandate to the SEC to adopt rules by January of 2003, prohibiting certain non-auditing services to corporations and clarifying the relationship that there is between the two entities to investors.
The IBT appreciates this opportunity to comment on some of the details of the proposal that will affect our funds directly. We are pleased to see that some of the proposals go well beyond what the Sarbanes-Oxley Act requires.
The issue of true auditor independence is one that the IBT and our individual funds have long advocated through comment letters, shareholder resolutions, and discussions that we have had with other stakeholder organizations. What follows is a deeper critique of portions of the proposal.
The proposal appears to amend some of the existing SEC rules to put additional restrictions on non-audit work that auditors may provide for the corporations they service. The overriding principles of the proposal are that auditors should: not audit their own work; not perform management functions; not act as advocates for the companies that they work for; nor, promote in any way the company’s securities. We support any proposal or final law that works toward achieving these principles. The problem with the current rules is that there are far too many exceptions to the main rules. This proposal eliminates some of those exceptions. In particular, we support new rules that prohibit auditors from taking on any management functions including acting as an officer, manager, or director of the company for which they are providing auditing services. Further, we support proposed rules that ban auditors from acting as a broker-dealer or investment advisor. This proposed rule eliminates potential conflicts of interest for auditors that, in the past, have undermined the best interests of investors.
In addition, we are encouraged that the proposal creates a new category, namely expert services, that auditors may not perform. This will protect the investor from any undue conflict of interest, while still allowing auditors to assist the audit committee of a board of directors to investigate any potential accounting troubles at the corporation. In our opinion, anytime that an auditor of a corporation is seen as an advocate for the corporation that they are servicing, there is an appearance of impropriety. Auditors should be hired to perform unbiased auditing for a corporation. Anything more is an inappropriate misuse of the auditor’s expertise. We believe that the proposal is quite clear in its distinction between advocacy and providing appropriate assistance to an audit committee as part of the auditor’s duty.
As part of the Sarbanes-Oxley Act, partners of an auditing firm that service a particular company must be rotated every five years. We are happy to see that the SEC goes beyond what is required under the Act and mandates this for all partners of the firm, not just the lead partner. This will help to maintain the true independence that is required to ensure that the financials provided to equity investors are an accurate report of the corporations’ true financial condition.
Perhaps one of the most important reforms that the new proposal puts forth is the plan to increase the duties and responsibilities of the audit committee of the board of directors. As proposed, all audit committees will be responsible for hiring and firing the outside auditing firm, having ongoing communication with the auditor, and pre-approving all non-audit work that the firm may be doing for the corporation. In the past, audit committees have blindly put blank check approval on work done by the outside auditor on behalf of the corporation. This proposal requires that there is real communication between the auditor and the board of directors of all work done for the corporation.
If you have any questions regarding our comments, please contact the IBT’s Office of Corporate Affairs at 202-624-8100. Again, we thank you for this opportunity to comment on this very important step towards true corporate governance reform.
Sincerely,
James P. Hoffa
General President
International Brotherhood of Teamsters