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Cc: The Honorable Harvey L. Pitt, Chairman
The Honorable Paul S. Atkins, Commissioner
The Honorable Roel C. Campos, Commissioner
The Honorable Cynthia A. Glassman, Commissioner
The Honorable Harvey J. Goldschmid, Commissioner
Alan L. Beller, Director, Division of Corporation Finance
Giovanni T. Prezioso, General Counsel
Ethiopis Tafara, Director, Officer of International Affairs
Richard T. Grasso, New York Stock Exchange
Georges Ugeux, New York Stock Exchange
Hardwick Simmons, NASDAQ

____________________________

1

An example of a report by an Italian board of statutory auditors to an Italian company's shareholders in connection with the approval by the shareholders of a company's annual financial statements is attached hereto as Annex 2. Annex 1 Role of Board of Statutory Auditors (Collegio Sindacale) and Italian Corporate Governance In its proposed rule, "Standards relating to listed company audit committees", (Release Nos. 33-8713, 34-47137, IC-25885; File No. 57-02-03) the SEC has recognized - apparently with specific but not exclusive reference to Japan1 - the substantial equivalence of an audit committee established within the board of directors with a separate body, e.g. a board of statutory auditors, that also pursues, under local laws or listing provisions, the primary objective of ensuring "oversight of outside auditors that is independent of management" (including resolution of disagreements between management and the auditor regarding financial reporting). An exemption is proposed for non-U.S. companies that maintain such bodies that would exempt such companies from the requirements to satisfy the independence requirement and the specific responsibilities relating to registered public accounting firms according to new paragraphs (b)(1) and (b)(2) of Section 10A-3, of the Proposed Rule. The statutory auditors must nonetheless satisfy certain requirements including establishing procedures for handling complaints, funding and the authority to engage independent advisors, and the requirement that the body in question be responsible, "to the extent permitted by law", for the appointment and retention of the outside auditor, no matter how such responsibility is vested in such body. When taking into account statutes, listing requirements and Consob's regulations (including recommendations), the situation of joint stock companies (società per azioni) which are listed in Italy does not correspond exactly to the proposed exemption provided in the SEC's rule proposal. Nonetheless, as we state in the body of our letter, we believe that the exemption should be broadened in order to allow an Italian board of statutory auditors to act as the audit committee as required by the SEC's proposed rule, as we believe that - in this respect - the safeguards built into the Italian legal system address the same concerns that the Sarbanes-Oxley Act is intended to remedy. In particular, it is worth noting that: the corporate bodies of Italian "società per azioni"2 are laid down by law and assigned specific powers that can be delegated only in part. As a principle, it does not appear possible for the tasks and duties (and especially the responsibilities and obligations) of the board of auditors to be modified by means of resolutions adopted by the board of directors or even the shareholders' meeting; the conferment of the engagement to perform the mandatory audit is governed by Legislative Decree 58/1998 (the Draghi Law on Financial Intermediation), which entrusts this task exclusively to the shareholders' meeting, acting on a proposal from the board of directors after consultation with the board of auditors, which is required to give an opinion on the issue (Article 159.1). In addition, according to Italian law, the shareholders' meeting is simultaneously required to both confer the engagement and decide the independent auditor's compensation. It should also be noted that the mandatory audit under the Draghi Law refers to the auditing of financial statements of the company and the consolidated financial statements as defined in Italian law and not to the auditing of the annual report as drawn up under the securities laws. In practice, however, most Italian listed companies use the same auditors for both obvious reasons of economy and above all efficiency; according to the Draghi Law, the shareholders' meeting also has the power to terminate the engagement of the independent auditor, again after consultation with the board of auditors, as above. Such termination is allowed for cause only (Article 159.2). In Italy termination without cause is simply forbidden, as a further safeguard of the independence of outside auditors; even if termination3 as such is not within the authority of the board of auditors, it should be noted that (in addition to the board of auditors expressing a mandatory opinion on such termination) the proposal of termination may be presented to the shareholders' meeting either by the board of directors or the board of auditors, which - according to Article 151.2 - is granted full power to convene the shareholders4 whenever it deems it appropriate, after simple communication to the chairman of the board of directors; Consob recommends that the conferment on the outside auditor of "additional engagements" (which include both audit and non-audit services) should be approved by the board of directors,5 again after consultation with the board of auditors (Consob Communication no. 97001574 of February 20, 1997). The pre-approval requirement is met either through resolutions taken on a case-by-case basis or by adopting a pre-approval policy, according to which - for instance - all services required to be performed pursuant to applicable laws are deemed to be approved and allowed. Consob also requires the board of auditors to give an account to the annual meeting of shareholders of both the additional engagements (and the corresponding fees) conferred on the registered public accounting firm and any engagement (and the corresponding fees) granted to affiliates6 of the independent auditor (Consob Communication no. 1025564 of April 6, 2001). As a result additional engagements granted according to pre-approval policies are subsequently submitted to the board of auditors; independence (with respect to the company, its subsidiaries, its parent companies and each of their directors) is a mandatory requirement for the members of the board of auditors, which independence the Draghi Law strengthened by providing for the election of a minimum number of members by the minority shareholders (Article 148 of Legislative Decree 58/1998). In particular, statutory auditors cannot be (i) directors of the company, (ii) spouses or other relatives up to the fourth degree of kinship of the directors of the company, its subsidiaries or parent companies, (iii) persons who work either in a self-employed capacity or as employees for the company or for its subsidiaries or parent companies. In addition, the statutory auditors of the audited company cannot be shareholders, directors, statutory auditors or executive officers (or their relatives up to the fourth degree of kinship) of the accounting firm engaged to perform the mandatory audit (with a three-year cooling-off period): see Article 3 of Legislative Decree n. 136/1975; the board of auditors - whose professional experience and integrity requirements are governed by law (see Ministerial Decree no. 162/2000 by the Ministry of Justice) and by the company's bylaws under Article 148 of Legislative Decree 58/19987 - has a special relationship (i) with the persons responsible for the internal control function, who must report to the board of auditors at their own initiative or at the request of just one member of such board (Article 150 of Legislative Decree 58/1998) and (ii) with the independent auditor, with which it exchanges data and information relevant to the performance of their respective duties. This information flow from the independent auditor to the board of auditors and vice-versa is mandatory, so that the independent auditor has to report to the board of auditors whenever it deems it appropriate or is required to do so pursuant to applicable rules; the board of auditors does not have direct responsibility for establishing accounting controls but, under Article 149.1(c) of Legislative Decree 58/1998, oversees "the adequacy of the company's organizational structure for matters within the scope of the board's authority, the adequacy of the internal control system and the administrative and accounting system, and the reliability of the latter in correctly representing the company's transactions" (in other words it is responsible for overseeing the internal controls and procedures for financial reporting); resolution of disagreements between management and the independent auditor regarding financial reporting is not a specific responsibility of the board of auditors; however, neither does it fall within the responsibility of the board of directors, which is the ultimate counterpart of the independent auditors, because the legal responsibility for financial reporting8 rests with the directors only. On the other hand, if a disagreement arises during the drafting process of financial statements, the independent auditor is required to report the issue to the board of auditors in accordance with the aforementioned obligation of "exchanging data and information", pursuant to Article 150 of the Draghi Law. As a result, the board of auditors will be given the chance to question the board of directors in order to obtain proper explanation and detail9. If the board of auditors is not satisfied, it is able to choose one or more of the following courses of action: notifying Consob (and, in the case of a bank, the Bank of Italy) without delay of the irregularity found (see hereinafter for details), reporting the fact to the courts pursuant to Article 2409 of the Italian Civil Code (whether it has a well-founded suspicion of serious irregularities in the directors' performance of their duties), reporting the matter to the annual shareholders' meeting (see hereinafter for details), or convening the board of directors or even a shareholders' meeting; according to Article 149.3 of the Draghi Law, the board of auditors has an obligation to notify Consob (and, in the case of banks, the Bank of Italy pursuant to Article 52 of Legislative Decree 385/1993) without delay of irregularities found in the performance of its overall oversight activity, which applies also to any irregularity committed by the registered public accounting firm (or - as the case may be - by the board of directors in performing its financial reporting responsibilities). If the board of auditors fails to make this notification, each statutory auditor is subject to a pecuniary administrative sanction (Article 193.3). In any case, where Consob finds serious irregularities in the performance of auditing activity (including as a result of notification by an issuer's board of auditors), it has extensive punitive powers over the registered public accounting firm, and is even given the power to delete the firm from the register, when the irregularities are particularly serious or the firm does not comply with its orders (Article 163); Article 153 of Legislative Decree 58/1998 calls for the board of auditors to report to the annual shareholders' meeting about both (i) the activities performed and (ii) any discovered omission and censurable fact. In addition, the same board of auditors is empowered to submit proposals to the shareholders with reference to the financial statements, their approval and any matters in the auditors' responsibility (ibid.). As a result, any matter arising between the company and the registered public accounting firm is finally dealt with by the shareholders' meeting, which is the body legally in charge of the appointment, compensation and termination of the independent auditor, but the submission of all such issues to the shareholders' meeting is done either in consultation with or at the behest of the board of auditors. The board of auditors oversees matters related to the independent auditor through the issuance of opinions (about appointment or termination), the submission of proposals (regarding the financial statements or otherwise, including proposals of termination, if a just cause arises), the presentation of reports (with comments and submission of any relevant information) to the shareholders meeting; pursuant to the law, the board of auditors receives complaints made by shareholders (Article 2408 of the Civil Code). The practice of complaints or submissions of concern from people other than shareholders is not dealt with by the law, but Consob - in order to strengthen it - requires the board of auditors to discuss any complaint it receives10 in its report to the annual meeting of shareholders and to indicate any steps it took as a consequence thereof (Consob Communication no. 1025564 of April 6, 2001); insofar as the board of auditors is required to oversee compliance with the law under Article 149.1(a) of Legislative Decree 58/1998, it would be fully entitled to receive the reports that a registrant's internal and external attorneys are required to make regarding "a material violation of securities laws or breach of fiduciary duty or similar violation by the company or any agent thereof" (Section 307 of the Sarbanes-Oxley Act); Italian law does not provide for the board of auditors to be able to engage external advisors using funds made available by the issuer. By law the members of the board of auditors may use their own assistants, at their own expense, to assess the adequacy and reliability of the administrative and accounting systems, but they can also use listed issuers' employees without any restrictions in performing their duties (Article 151 of Legislative Decree 58/1998). There does not, however, appear to be any reason why issuers cannot provide for appropriate funding on a voluntary basis and thus further safeguard the independence and effectiveness of the board of auditors' action according to the law and Consob's regulations. The powers and tasks of the board of auditors, as described above, derive from the approach to the relationship between the functions of management and control in the model of corporate governance inherent in the Civil Code currently in force (as amended with reference to listed companies by Legislative Decree 58/1998) which model was confirmed by the recent reform of company law (the so-called Vietti Law)11. Although under Italian law the board of directors could give a formal mandate to a committee composed of some of its members (technically, an executive committee under Article 2381 of the Civil Code) to perform the functions assigned to the audit committee by the Sarbanes-Oxley Act, to do so in the presence of a board of auditors (legally bound to perform its duties, as summarized above) would distort the role of the board of directors vis-à-vis the required functions and responsibilities of the board of auditors, by introducing principles belonging to a different system.12 This would result in two separate bodies performing substantially the same activities, which, as the Commission noted in its Release, would be costly and inefficient on the one hand and on the other hand, due to the creation of possible conflicts of powers and duties, could hinder the effective and smooth functioning of the overall system. It is for the reasons stated above that we request in our letter that the SEC modify the language of its proposed exemption, so as to accommodate the case of the Italian corporate governance system, since we do believe that equivalent protection to the relevant interests13 is provided by the corporate governance framework existing in an Italian listed company that has a board of auditors and - as is the practice - has adopted as an internal policy (i) strict compliance with Consob's recommendations regarding the conferment of "additional engagements" on the outside auditor and (ii) the assignment to the board of auditors - usually with the support of the persons in charge of internal auditing - of responsibility for handling complaints. These interests will be further protected when the board of directors gives the board of auditors a budget of its own allowing it to engage independent advisors at its own initiative and discretion.14 By broadening its exception the SEC would allow Italian companies to align themselves also with the best practice set out in the self-regulatory codes promoted by the primary listing market (the Italian Stock Exchange and its Preda Code) without this leading to an overlapping of functions, while improving the effectiveness of the overall system in the shareholders' and the market's interest: pursuant to the law and Consob's regulations the board of auditors would perform its control functions (of great importance vis-à-vis third parties, also in accordance with and for the purposes of US law) in a dialectic relationship with the board of directors (the management body); the internal control committee established within the board of directors according the Preda Code would give - in performing its function of providing the management body with advice and proposals15 - support to the board of directors in relation to its responsibility for the internal control system. ____________________________ 1 See footnote 88 of the proposed rule. 2 Such bodies are (i) the shareholders' meeting, (ii) the board of directors (the "consiglio di amministrazione"), that can delegate part of its powers either to an executive committee composed of directors only (the "comitato esecutivo), or to single directors (the "amministratori delegati") and (iii) the board of statutory auditors (the "collegio sindacale"). The board of directors and the board of statutory auditors are both directly and separately appointed by the shareholders' meeting. 3 We refer to termination instead of retention (the concept with which the SEC's Proposed Rule deals), since Italian law sets forth specific mandatory requirements for the duration of the independent auditor's engagement: according to Article 159.3 of the Draghi Law, the engagement shall last for three financial years and may be renewed not more than twice. 4 And also the directors. 5 Technically, the audit engagement for Form 20-F is of this type. See the preceding point in the text. 6 Consob asks for disclosure of engagements granted to any person who has set up a long term relationship with the accounting firm (typically: of an advisory or a consulting nature), as opposed to an occasional relationship. 7 So that the requirements necessary to be considered an "audit committee financial expert", in accordance with the SEC's recently adopted final rule implementing Section 407 of the Sarbanes-Oxley Act, could be deemed easily satisfied by members of the board of auditors, in view of the professional experience requirements applicable to them under Italian law. 8 According to Italian law the drafting of the annual financial statements of the company (to be approved by the shareholders' meeting) is collectively entrusted to the board of directors. The board is also responsible for the preparation of consolidated financial statements, and the interim financial statements (quarterly report and mid-term report), which are made public (in US through a Form 6-K) but are not submitted to the shareholders for approval. 9 The statutory auditors, jointly or severally, are granted the power to require the directors to supply information on the company's operations or on particular transactions and may at any time carry out inspections and controls (see Article 151.1 of the Draghi Law). 10 No matter whom they come from, and therefore including concerns submitted by employees. 11 Legislative Decree 6/2003, containing a "Comprehensive reform of the law governing private and public companies and cooperative companies, pursuant to Law 366/2001", effective as from 1 January 2004. 12 In particular, of the "monistic" system (that is: of the single-tier board system), which provides for "administration and control to be performed respectively by the board of directors and a committee established within the board" (new Article 2409-sexdecies of the Civil Code). 13 Where the interest the U.S. Congress intends to pursue is not that of assigning the tasks of the audit committee (protection of the effectiveness and reliability of the disclosure and reporting processes to be carried out by issuers) to one body rather than another, but that of safeguarding these functions by entrusting them to a body that is "strong, competent and vigilant". 14 The company's assuming the costs of the engagement of advisors at the board of auditors' request is a common practice. As of now these matters are usually dealt with on a case-by-case basis, but granting a budget to this end to the board of auditors certainly is within the authority of the board of directors of an Italian company. 15 The internal control committee recommended by the Preda Code of Conduct for Listed Companies is not a formal corporate body but a non-mandatory form of internal organization within the board of directors, a body entrusted with performing support functions (providing advice, examining issues and making proposals) for the board of directors (but never third parties). Annex 2 REPORT OF THE BOARD OF DIRECTORS TO THE SHAREHOLDERS' MEETING OF TELECOM ITALIA S.P.A. PURSUANT TO LEGISLATIVE DECREE 58/1998 ART 153 AND ART. 2429, PARAGRAPH 3 OF THE ITALIAN CIVIL CODE* Dear Shareholders, During the year ended December 31, 2001, the Board of Statutory Auditors carried out the supervisory work required by law, taking into account the code of ethics recommended by the National Boards of Dottori Commercialisti and Ragionieri. In preparing this report, the Board also took into consideration Consob Instruction No. 1025564 dated April 6, 2001, No. 97001574 dated February 20, 1997 and No. 98015375 dated February 27, 1998. The obligation to keep the Board of Statutory Auditors informed pursuant to Legislative Decree 58/1998, art. 150, paragraph 1 and article 13 of the corporate by-laws, resulted in the Board receiving periodic information and data from the directors at the Board of Directors' Meetings, which have always been attended by the Board of Statutory Auditors, and written communications dated October 26, 2001 and April 16, 2002 received respectively, from the Managing Director, Mr Enrico Bondi and the Chairman Mr Marco Tronchetti Provera. This information described the most important economic, financial and equity transactions entered into by Telecom Italia S.p.A. and which are described below: contribution to CSELT, which was simultaneously renamed Telecom Italia Lab, of the "Venture Capital and Innovation" business segment with the relative subscription to shares. Two additional capital stock increases were later subscribed to by Telecom Italia Lab; direct and indirect issue, through the subsidiary Sogerim, of three notes under the Global Medium Term Note Program; conversion of capital stock in euro following the resolution passed by the Extraordinary Shareholders' Meeting on May 3, 2001, through the re-denomination of the par value of the ordinary and savings shares and rounding up of the par value from Lire 1,000 to Euro 0.55 through the bonus increase of share capital (carried out by increasing the par value of the shares outstanding) effected by utilizing the reserve for treasury stock which became available following the cancellation of No. 112,998,070 savings shares of treasury stock and by the transfer of about Euro 187 million from the revaluation reserve ex law No. 72 of March 19, 1983; start of the securitization program of trade accounts receivable generated by services rendered to customers of Telecom Italia Domestic Wireline and the customers of Path.Net, a company which provides telephone services to the Public Administration; contribution to TIWeb S.A. of the investment held by Telecom Italia S.p.A. in Telsi Ltd, against a share capital increase by TIWeb S.A. to service the contribution; authorization for the buy-back of treasury stock for a maximum amount of Euro 1,500,000,000.00 voted by the Ordinary Shareholders' Meeting of Telecom Italia S.p.A. on November 7, 2001; divestiture of the investments held by Telecom Italia S.p.A. in the ex-consortiums Eutelsat (20.48%), Intelsat (2.77%), Immarsat (2.09%) and New Skies Satellites (3.91%). These investments were directly and indirectly conferred to a Newco, named Mirror International Holding, whose shares, in an amount equal to 70% of the holding, were then sold to a Lehman Brothers Merchant Banking mutual fund; incorporation of TI Media through the total non-proportional spin-off of Huit S.A.. The above transactions were described in the 2001 directors' report on operations and in the notes to the financial statements. The Board of Statutory Auditors has ascertained that the above transactions have been carried out in accordance with the law, the by-laws and general principles of economic rationale, ensuring that such transactions were not patently imprudent, risky, with potential conflict of interests, in contrast with the resolutions passed by the Shareholders' Meetings or such as to compromise the whole of the assets of the company. The Board of Statutory Auditors has not noted any unusual and/or atypical transactions entered into with third parties, related parties or intercompanies. The directors, in their report on operations, disclose the major related party transactions entered into by Telecom Italia Group (including Telecom Italia S.p.A.), to which reference should be made, also with respect to the characteristics of the transactions and their economic effects. In this sense, it should be pointed out that the manner of disclosure on this subject has been changed beginning from the 2001 financial statements, as described in the report on operations in "Related party transactions". The Board of Statutory Auditors has verified, with the assistance of the Internal Auditing function, that, in Telecom Italia S.p.A., adequate procedures are in force and have been followed in order to ensure that the above transactions are conducted at arms' length or according to specific regulatory provisions. Based on recommendations by the Board of Statutory Auditors, the Company, starting from the second half of 2001, began a thorough review of the issues connected with the obligation of disclosure pursuant to Legislative Decree 58/1998, art. 150, paragraph 1. Such review led to the drawing up of a new procedure, in March 2002, for complying with such obligations, that the Company has intention of experimenting beginning from the year 2002. The Board of Statutory Auditors, taking into account the size and structure of the Company and the Group, in principle, has expressed a positive opinion on this new procedure. The disclosure provided in the report on operations and in the statutory and consolidated financial statements, concerning transactions entered into by Telecom Italia S.p.A. with related parties or intercompanies, is sufficient, taking into account the size and structure of the Company. The audit firm, Reconta Ernst & Young S.p.A., on April 15, 2002, has issued its audit report in accordance with Legislative Decree No. 58/1998, art. 156 stating that the statutory financial statements and the consolidated financial statements at December 31, 2001 give a true and fair view of the financial position and results of operations of the Company and the Group. The report makes reference to the usual comments concerning the pension costs regulated by Law No. 58/1992. The same audit firm of Reconta Ernst & Young S.p.A. issued its report dated April 16, 2002, which contained no exceptions, on the sustainability report of the Telecom Italia Group for the year ended December 31, 2001. The Board of Statutory Auditors received five complaints under ex art. 2408 of the Italian Civil Code in 2001, concerning corporate matters and company problems In particular, such complaints related to the following issues: a) installation of a telephone pole by the Company on private property b) the alleged non-fulfillment of the deadline dates for filing documents for the Shareholders' Meeting c) the alleged existence of reasons for the ineligibility of a Managing Director d) the alleged illegal mechanism of overinvoicing some telephone bills e) the alleged impossibility of examining the corporate Books. The Board of Statutory Auditors, in all cases, carried out the appropriate inquiries and ascertained that there were no omissions, censurable facts or irregularities that needed to be brought to the attention of the Shareholders' Meeting. The Board of Statutory Auditors received no petitions. In 2001, Telecom Italia S.p.A. appointed Reconta Ernst & Young S.p.A. and PricewaterhouseCoopers S.p.A. to perform certain work other than the legal audit of the financial statements. The fees for this work, excluding out-of-pocket expenses and VAT, are summarized below: Reconta Ernst & Young S.p.A. (Euro) Accounting assistance connected with the preparation of Form 20-F 376,000.00 Issue of comfort letters in relation to the issue of "Telecom Italia S.p.A. € 1,500,000,000 Floating Rate Notes due 2005" 77,500.00 Audit procedures carried out with respect to the accounting situations at September 30, 2001 of certain Telecom Italia Group companies 362,000.000 Other work (procedures agreed and accounting assistance) 42,700.00 Total 858,200.00 858,200.00 PricewaterhouseCoopers S.p.A. (Thousands of lire) Work related to the "registration form F4" - conversion offering of saving shares 495,000 Coordination work in the capital market area 50,000 Total 545,000 The above fees appear adequate in relation to the complexity and magnitude of the work performed. In 2001, Telecom Italia S.p.A. did not confer any appointments to parties connected by continuous working relationships with Reconta Ernst & Young S.p.A., whereas it appointed a party connected by continuous working relationships to PricewaterhouseCoopers S.p.A. for a total of about Euro 105,000. In 2001, the Board of Statutory Auditors issued a specific opinion to the Board of Directors, pursuant to ex art. 2389, paragraph 2 of the Italian Civil Code, concerning the remuneration assigned to the Chairman and Managing Directors, as well as opinions pursuant to ex art. 2386, paragraph 1 of the Italian Civil Code with regard to the replacement of directors. It also issued opinions ex art. 159 of Legislative Decree 58/1998 with regard to the proposal for the revocation of the appointment for the audit for the three years 2000-2002, previously conferred to PricewaterhouseCoopers S.p.A., and on the proposal to appoint the firm of Reconta Ernst & Young S.p.A. for the audit of the financial statements for the three years 2001-2003, and the proposal to adjust the fees due PricewaterhouseCoopers S.p.A. in relation to the activities carried out for the audit of the financial statements for the year 2000. The Board of Statutory Auditors also issued an opinion on the conversion of the share capital in euro voted by the Extraordinary Shareholders' Meeting on May 3, 2001. In 2001, the meetings of the Board of Directors numbered eighteen; those of the Audit and Corporate Governance Committee numbered six. The Board of Statutory Auditors, in 2001, met twenty-nine times. The Board also attended the ordinary and extraordinary sessions of the Shareholders' Meetings and the Board of Directors' Meetings. The Board, lastly, through its Chairman, another statutory auditor or jointly, took part, by express invitation, in the meetings of the Audit and Corporate Governance Committee held during the year. The Board of Statutory Auditors has acquired information and monitored, as far as its responsibilities are concerned, the proper keeping of administration, through direct observation, the gathering of information from those in charge of the organizational functions, pursuant to Legislative Decree No. 58/1998, ex art. 151, paragraph 2, and meetings with the Internal Auditing function and meetings with the audit firm of PricewaterhouseCoopers S.p.A. up to July 2001 and Reconta Ernst & Young S.p.A. from August 2001, for purposes of a reciprocal exchange of important information and data. The Board of Statutory Auditors, in the same manner, has acquired information and monitored, as far as its responsibilities are concerned, the adequacy of the organizational structure of the Company. In particular, the Board took note of the change in the organizational model of the Telecom Italia Group, which, as regards Telecom Italia S.p.A., is formed by a top management composed of the Chairman and two Managing Directors (instead of a President-Managing Director) and the first line is represented by the corporate functions, business units and operating activities. The functioning of the organizational structure is ensured by three macro-areas headed, respectively, by the Chairman, with the aim of creating economic value and overseeing the identity and responsibilities of the Group, and by two Managing Directors who guarantee respectively, both the governing of the Group, the rationalization and search for synergies, in addition to the management of the common service areas, and also the development, management and integration of the businesses. The definition of policy and the governing of questions transversal to the business units, the operating activities and the Companies of the Group, are guaranteed by a model based on "professional families" which, by grouping operating resources based on functional homogeneous environments found at the different organizational levels, makes it possible to bring the governance of the various business units/companies functionally to top management and the corporate structures. Governing mechanisms have also been introduced which lend support to the management and control of the business units and the operating activities on the part of top management constituted by the Steering Committee, Business Management Meetings and the Investment Committee. to the evolution of powers conferred for operations, the decisional structures and the internal control system - subjects on which the Board of Statutory Auditors has already expounded at the Shareholders' Meeting of Telecom Italia S.p.A. for the 2000 financial statements that was held on June 12, 2001 and in the memorandum on the "Comments by the Board of Statutory Auditors on the report for the six months ending June 30, 2001" - a new systems of powers has been designed for corporate representation on the basis of the powers conferred by the Board of Directors to the Chairman and Managing Directors in the Meeting on November 7, 2001 and in conjunction with the rules for corporate governance of the Company. This new system is based on the following principles: strict correlation between the organizational positions and the powers conferred, attributing power of attorney exclusively to those parties who, on the basis of their organizational mandates, carry out trading activities with third parties; right to sub-delegate powers which allows a more direct definition of the powers of corporate representation and control attributed to those with powers without the need of going to top management for the assignment of the relative power of attorney; introduction of precise limits in exercising the powers in relation to the commitments for expenditures, areas of expertise and joint signatures; period of the power of attorney connected with the permanence of the position covered by introducing a specific clause in the act attributing the powers; notation indicating the type of power of attorney correlating the use with the budget system and the corporate procedures. Furthermore, it should be noted that currently sub-powers of attorney are being issued by the persons in charge of the functions and business units to the various corporate structures. The procedures in Telecom Italia S.p.A. that are now being followed by the Group have been prepared with a view towards achieving common rules, relative to the more critical corporate processes, in terms of homogeneity and the strengthening of the internal control systems. Such procedures are aimed at defining the relationships for coordination of the various business functions and the relationships between the corporate functions and business units. The Board of Statutory Auditors, as far as its responsibilities are concerned, has monitored the aspects of legitimacy and correct administrative procedures relating to the decisional process concerning the valuation of the corporate investment holdings. The monitoring, in particular, regarded whether the pertinent bodies made decisions on the basis of information, appraisals and data gathered and/or processed by internal technical staff or outside consultants. Even at the time of the aforementioned Shareholders' Meeting on the 2000 financial statements, the Board recommended that the economic value of certain foreign subsidiaries operating in the Internet sector should be monitored more closely in view of the evolutionary stage of this business that was characterized by instability and unforeseen factors on a world scale. In the "Comments by the Board of Statutory Auditors on the report for the six months ending June 30, 2001", as well, - observations were made as to the fact that some companies in the new economy sector had not been written down because they were considered strategic or because they were in the start-up phase or, finally, because there was substantially no change in the business - the Board of Statutory Auditors itself recommended that the value of the investments should be continuously monitored. As recommended by the Audit and Corporate Governance Committee and the Board of Statutory Auditors, the Board of Directors of Telecom Italia S.p.A., in its meeting of September 12, 2001, voted to develop a procedure for checking the value of investment holdings. At the end of the year, the new management developed and implemented a new systematic procedure for valuing investments, establishing the pertinent bodies, the level for delegating powers and the process for approving and monitoring investments over time. At the time of preparing the draft financial statement for 2001, the directors checked the value of the investments and adjusted them in relation to the results of the new procedures and the new strategic guidelines of the Company. The process of estimation was also supported by the results of some outside consultants regarding the valuation of Seat Pagine Gialle S.p.A. and a large part of the portfolio of Stet International Netherlands N.V. and Tim International N.V. (ex-S.M.H. N.V.). The audit firm of Reconta Ernst & Young S.p.A., for purposes of furnishing the necessary elements for valuing the investment holdings, carried out - according to a specific appointment by Telecom Italia S.p.A. - verification procedures relating to the companies in the Telecom Italia Group, presenting the documents in December 2001 and March 2002. Last year, a delegated law - Legislative Decree No. 231 of June 8, 2001 - introduced administrative responsibility into Italian law as regards the criminal proceedings of companies for specific offenses that eventually may be committed in the interests of and/or to the benefit of the companies themselves by those who hold positions of representation, administration, management and/or by their employees. The Board of Statutory Auditors has regularly followed, together with the Audit and Corporate Governance Committee, all that has been proposed to date as regards this issue. To this end, the Company is outlining a development plan within the Group aimed at ensuring that the law in question will be followed The Board of Statutory Auditors has evaluated and monitored the adequacy of the internal control system. In particular, it regularly gathered information on the activities carried out, by meetings with those in charge of the Internal Auditing function and by obtaining specific documentation on a periodical basis; it also requested and obtained evidence of the steps taken to correct critical areas. After the adoption of the new organizational model in the second half of the year, the scope of the audit examination was revised as it, too, was affected by the new organizational structure. The re-examination of the internal control system recently led to the concentration of the internal audit work of Telecom Italia S.p.A. and the subsidiaries Tim S.p.A. and Seat Pagine Gialle S.p.A. in a specific company, In.Tel.Audit - Società consortile a r.l.. The Board of Statutory Auditors has evaluated and monitored the adequacy and the administrative and accounting system, as well as its reliability to correctly represent the operating events, by obtaining information from those in charge of the respective functions, examining corporate documentation and reviewing the results of the work carried out by the audit firm. The instructions given by Telecom Italia S.p.A. to its subsidiaries, pursuant to art. 114, paragraph 2, of Legislative Decree No. 58/1998, appear adequate for purposes of fulfilling the obligation regarding communication as required by law. The Board of Statutory Auditors has ascertained, through direct verification and information obtained from the audit firm, that the laws have been respected with regard to the preparation and formation of the statutory financial statements of Telecom Italia S.p.A. and the consolidated financial statements of the Group as well as the directors' report accompanying said statements. In particular, the Group's performance by business sector and by geographical area has been presented by taking into account Consob Instruction No. 98084143 dated October 27, 1998. The Sustainability Report of the Telecom Italia Group at December 31, 2001 is being presented, for the first time, at the Shareholders' Meeting of Telecom Italia S.p.A.. The Company, through its own code of conduct, follows the Code of Self-discipline of the Committee for the Corporate Governance of listed companies. To this end, the Audit and Corporate Governance Committee and the Remuneration Committee for the compensation to directors have been set up and are operational. During the course of the foregoing monitoring activities, there were no significant facts that came to our attention such that would need to be reported to the controlling bodies or mentioned in this report except for a note to Consob concerning the omission of two situations that should have been communicated to the Board of Statutory Auditors in accordance with art. 150, paragraph 1, of Legislative Decree 58/1998 and which became known when the six-month financial statements at June 30, 2001 were examined. A review by the Board of the transactions connected with these situations did not result in any matters to report. The examination of the reports issued as set forth by art. 153 and art. 156 Legislative Decree 58/1998, respectively by the Board of Statutory Auditors and the audit firms of the subsidiaries of Telecom Italia S.p.A., with stocks listed on regulated markets and managed by Borsa Italiana S.p.A. or organized as business units (Tim S.p.A., Seat Pagine Gialle S.p.A., IMMSI S.p.A., Finsiel S.p.A. and Telespazio S.p.A.), show no significant matters for attention. The Board of Statutory Auditors, at the Shareholders' Meeting of Telecom Italia S.p.A. on the 2000 financial statements held on June 12, 2001, discussed, as to its knowledge, the events regarding the acquisition, in June 1997, by Stet International Netherlands N.V., of a 29% stake in Telekom Srbija. The Board followed the matter also by interviewing the persons in charge of foreign operations: based on the activities carried out, currently, no significant variations have emerged in the situation described at the aforementioned Shareholders' Meeting and at the time of preparing the "Comments by the Board of Statutory Auditors on the report for the six months ending June 30, 2001". The Board of Statutory Auditors, at the Shareholders' Meeting of Telecom Italia S.p.A. on the 2000 financial statements held on June 12, 2001, discussed, as to its knowledge, the events regarding the compensation package to Lorenzo Pellicioli, who, at that time, was the Managing Director of Seat Pagine Gialle S.p.A., reserving the right to reach its conclusions after obtaining an authoritative and independent opinion on the aspects of the resolutions and disclosures on the subject. This opinion was issued on June 11, 2001 and transmitted to the Board of Statutory Auditors on June 13, 2001. The Board of Statutory Auditors, in its "Comments by the Board of Statutory Auditors on the report for the six months ending June 30, 2001" referred to the later evolution, which can be summarized by the decision taken by the Audit and Corporate Governance Committee and by the Board of Statutory Auditors - which worked together closely on the question - to ask the aforementioned legal counsel for certain additional information, as well as to ask an authoritative and independent consultant in corporate matters certain precise information on the method and the calculation of the compensation package later paid to Mr Pellicioli. The additional information from the legal counsel and the precise information from the consultant in corporate matters were issued, respectively, on February 6, 2002 and January 21, 2002. The Board of Statutory Auditors submitted the matter to the Consob in its memorandum dated March 6, 2002 (sending a copy to the Chairman of the Company and the audit firm of Reconta Ernst & Young S.p.A.), whereas the Audit and Corporate Governance Committee presented its memorandum to the Board of Directors of the Company in its meeting of March 26, 2002, the same date on which the Board of Statutory Auditors sent its memorandum to the Consob. The Board of Statutory Auditors, on the basis of the above opinions and after a careful analysis of the available documentation, reached the following conclusionsion: Telecom Italia S.p.A. under the contracts on August 8, 1997 and March 15, 2000, assumed and then confirmed its obligation to contribute to the compensation package in favor of Mr Pellicioli. The purchase contract dated August 8, 1997 was signed by the Deputy General Manager of Telecom Italia S.p.A. who had received power of attorney on August 5, 1997 from the Managing Director by the powers vested in him by the Board of Directors on February 26, 1997. From a quantitative standpoint, the benefits paid by Huit Sarl to Mr Lorenzo Pellicioli, both with regard to the variable and fixed compensation, result from the agreements that had at one time been decided. The compensation package to Mr Pellicioli does not appear to fall within the framework of the advantages to the directors, in respect of which the project for the demerger/merger of Tin.it-Seat must make reference. The economic benefit was decided and developed when the project for the merger of Tin.it-Seat had not yet been either contemplated or drawn up. External information to the market about the compensation package does not conform to the rules of best practice as regards communication, but this does not mean that the company violated an laws. Information on the compensation package to the Board of Directors and Board of Statutory Auditors, by the directors with powers, was not specific and direct, with possible violation by them of their responsibilities to fully refer such information. Nevertheless, the comments made by the legal counsel should be mentioned, according to which, on the one hand, this "does not invalidate the commitments undertaken with the counterparties, and, on the other hand, could legitimize actions for damages if it could be demonstrated (of which I have no evidence at this time) that a better disclosure could have caused a change in direction and that this (which I do not believe) could have been legally possible without the agreement of the counterparties". Lastly, the Board of Directors, having been informed - as described above - through the memorandum of the Board of Statutory Auditors to Consob on this specific issue and in light of the results of the investigation carried out by the Audit and Corporate Governance Committee, reached its own conclusions which concur with those of the two consultants, respectively as to the legal and corporate issues, excluding - at this time - that further inquiries or initiative should be started. As far as the Board of Statutory Auditors is concerned, having taken note of the results of the statutory financial statements for the year ended December 31, 2001, it has no objections to the proposal by the Board of Directors for the appropriation of the net income for the year. Rome, April 19, 2002 The Board of Statutory Auditors The Chairman ____________________________ * Report of Statutory Auditors of Telecom Italia delivered in connection with 2001 Annual Report. The length and scope of reports of Statutory Auditors will vary from year to year and by Company depending on levels of corporate action on transactions which may occur during the year reported on.