December 27, 2000
Dear Members of the Audit Committee:
Almost a year ago, the Commission, our major markets and standard setters - building on the work of the Blue Ribbon Committee on Audit Committee Effectiveness - adopted rules that strengthen the audit committee's independence, and give its members the tools and the wherewithal to fulfill their duty to the investing public. In addition, the rules improve communications, through greater disclosure, among the board, outside auditors and management.
When auditors and the board engage in frank and meaningful discussions about the significant, but sometimes gray areas of accounting, both the company' s and its shareholders' interests are served. In this way, the board, including the audit committee, management, and outside auditors form a "three-legged stool" of responsible disclosure and active oversight.
In recent months, the Commission and the accounting profession have been engaged in a discussion on the vital issue of auditor independence. Among other reasons, increased economic pressures on the profession, coupled with greater competition and consolidation, mandated that we modernize and further clarify independence requirements. This discussion has led to a combination of rules and disclosures that establish clear guidelines on the non-audit services an auditor may provide to an audit client, as well as the meaningful involvement of the audit committee in consideration of consulting services that may impair independence. More specifically, the Commission's rules require companies to state in their proxy statement whether the audit committee has considered whether the provision of the non-audit services is compatible with maintaining the auditor's independence.
In August, the Panel on Audit Effectiveness issued its final report recommending that, among other things, audit committees obtain annual reports from management assessing the company's internal controls, specify in their charters that the outside auditor is ultimately accountable to the board of directors and audit committee, inquire about time pressures on the auditor and pre-approve non-audit services provided by the auditor.
The Panel, more specifically, provided guidance an audit committee can use to determine the appropriateness of a service. This guidance includes:
I encourage your audit committee to discuss the Panel's recommendations as well as these ten factors and consider them in relevant discussions with your auditor. The Panel's report can be found at www.pobauditpanel.org. I also encourage you to read the Commission's rule release at www.sec.gov/rules/final/33-7919.htm.
During my almost eight years at the Commission, I have come to believe that one of the most reliable guardians of the public interest is a competent, committed, independent and tough-minded audit committee. The audit committee stands to protect and preserve the integrity of America's financial reporting process. I encourage your committee to take every step possible to ensure that the integrity of the financial statements, and by extension, the interest of shareholders, remains second to none.