Emerson Electric Co.February 18, 2003 VIA EMAIL Jonathan G. Katz
RE: Comments on Proposed Rules Pursuant to Section 301 of the Sarbanes-Oxley Act of 2002; Release Nos. 33-8173, 34-47137 and IC-25885, File No. S7-02-03 Dear Mr. Katz: I am Senior Vice President, Secretary and General Counsel of Emerson Electric Co. ("Emerson"). Emerson's common stock is registered under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") and is traded on the New York Stock Exchange. The purpose of this letter is to provide the Commission with Emerson's comments in response to the Proposed Rules Pursuant to Section 301 of the Sarbanes-Oxley Act of 2002 (the "Act"): Standards Relating to Listed Company Audit Committees; Release Nos. 33-8173, 34-47137 and IC-25885, File No. S7-02-03 (the "Proposed Rules"). Emerson supports the goals of Congress manifested in the Sarbanes-Oxley Act of 2002 (the "Act") to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. However, we are submitting this letter to highlight some of the practical implications that Emerson and other reporting companies are likely to encounter in attempting to comply with the Proposed Rules. Because the Act gives the Commission a significant role in implementing rules relating to many of the Act's new requirements, Emerson urges the Commission to ensure that, to the extent the Commission has been left with rule-making discretion under the Act (and otherwise under the securities laws, including, in particular with respect to the Commission's general exemptive authority under Section 36 of the Exchange Act and its rule-making authority under Section 23 of the Exchange Act), it carefully weighs the benefits to the investing public against the burdens to be placed on issuers by any new rules. Emerson submits the following comments before the Commission adopts final rules regarding standards for listed company audit committees. The Proposed Rules would require the national securities exchanges and national securities associations to prohibit listing of any security of an issuer not in compliance with the standards set forth in the Proposed Rules. The standards in the Proposed Rules require that: (1) each member of the audit committee be independent according to specified criteria; (2) the audit committee be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged to prepare or issue an audit report or performing other audit, review or attest services for the issuer; (3) an issuer's registered public accounting firms must report directly to the audit committee; (4) the audit committee must establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting control or auditing matters, including the anonymous submission of such matters by employees; (5) the audit committee must have the authority to hire counsel and other outside advisors as it deems necessary; and (6) each issuer must provide appropriate funding for its audit committee. Audit Committee Independence The requirement in the Proposed Rules that each member of an audit committee be independent includes a requirement that no audit committee member, no family member of an audit committee member, and no law firm, accounting firm, consulting firm, investment bank or similar entity in which any of them is a partner, member or principal or holds a similar position, may receive any consulting, advisory or other compensatory fee from the issuer, other than for service as a member of the issuer's board of directors or committees thereof. This is a strict prohibition with no permitted de minimis amount. Therefore, the compensatory fee restriction would prohibit attorneys, accountants and consultants who perform, or whose firms perform, any minimal services for an issuer from serving on such issuer's audit committee. This prohibition unnecessarily restricts the field of qualified audit committee members at a time when other laws and Commission rules are making it more difficult to locate and recruit audit committee members due to heightened liability and increased responsibility. Allowing audit committee members, or at least firms with which they are affiliated, to receive some relatively small amount of fees from the issuer would not impair the independence of the audit committee member and would greatly increase the field of candidates qualified for audit committee membership. In addition, Item 404 of Regulation S-K ("Item 404") already addresses payments to a firm in which a director is a member and requires disclosure if such payments exceed five percent of the revenues of either the issuer or the outside firm. Issuers often have representatives of their law or investment banking firms on their boards and/or audit committees. This outside participation provides significant value and greatly improves audit committee oversight of the issuer's auditing and financial reporting functions. Therefore, in implementing Section 301 of the Act, the Commission should consider adopting the standard of Item 404 and prohibit service on an audit committee only if the fees received from the issuer by the director's firm exceed five percent of the firm's revenues. Allowing firms affiliated with audit committee members to receive de minimis amounts of fees without impairing independence would also avoid an inconsistency with the statement in the Proposed Rules that they are not intended to preclude independence on the basis of ordinary commercial business relationships. As drafted, the Proposed Rules would prohibit an audit committee member's affiliated legal, accounting, investment banking, consulting or similar advisory firm from receiving any fees from the issuer, while permitting another audit committee member's affiliated commercial firm (such as a vendor of products to the issuer) to receive substantial benefits from the issuer, subject only to the Item 404 disclosure requirements. Since receipt of such commercial fees by a firm affiliated with an audit committee member is not considered an impairment of the audit committee member's independence, neither should de minimis fees paid to another audit committee member's legal, accounting, consulting, investment banking or similar firm, receipt of which often has no impact on the compensation the audit committee member receives. In addition, there are many services provided by legal, accounting, consulting, investment banking and similar firms that are in the nature of ordinary course, ongoing commercial business relationships that would not impair the audit committee member's independence any more than any other ordinary commercial business relationship. Therefore, receipt of a de minimis amount of such advisory fees by an audit committee member affiliated firm should not result in the audit committee member being deemed not independent, and therefore not qualified to serve on the audit committee. The strict fee prohibition in the Proposed Rules would also prohibit the audit committee from hiring legal, accounting or consulting firms affiliated with its members to serve as outside advisors to the audit committee. Because these firms are hired by the audit committee rather than management, the audit committee member's independence from management would not be impaired by payment of fees to the member's firm, as it would be if such firm were hired by management. Therefore, any prohibition on the receipt of fees by an entity with which an audit committee member is affiliated for services provided directly to the audit committee would be unnecessary, and perhaps counterproductive. Finally, whether or not the strict fee prohibition is retained in the final rules, we would request that a significant implementation period be provided for in the final rules to allow companies time to locate and recruit new audit committee members meeting the independence standards set forth in the Proposed Rules and all of the other requirements set forth in the Act. Oversight of Registered Public Accounting Firm The Proposed Rules require that the audit committee be directly responsible for the appointment, compensation and oversight of the work of any registered public accounting firm engaged for audit or audit-related work, including authority to terminate an auditor. While we agree with vesting power to hire, fire and compensate an auditor in the audit committee, we are concerned with the requirement that the audit committee have the duty to oversee the work of the auditor. The proposed rules give no indication regarding the level of oversight required by the audit committee. In completing an audit or audit-related work, the registered public accounting firm will be in contact with the issuer and will be performing reviews of the issuer's books and records on a daily basis for at least part of the year, if not year round. Audit committees typically meet only periodically, in many cases no more than quarterly, and rarely more than monthly. Therefore, oversight of the day-to-day conduct of the registered public accounting firm by the audit committee is not feasible. Review of the audit report upon completion is already a responsibility of the audit committee and discussions regarding accounting policies, estimates and judgments and disagreements and communications with management are already required by other sections of the Act. Therefore, it is unclear what level of oversight would be called for by the Proposed Rules. We would request that the Commission provide greater guidance regarding the audit committee oversight required, keeping in mind that due to the nature and responsibilities of the audit committee, any in-depth, hands-on oversight of the audit and the registered public accounting firm will be impractical. ___________________________________________ Emerson urges the Commission to consider carefully the issues raised in this letter with regard to the Proposed Rules. The Proposed Rules unnecessarily restrict the field of directors who may serve as audit committee members and may place an undue oversight burden on the audit committee. At the least, the Proposed Rules, when finalized, should provide a significant phase-in period during which reporting companies would not be required to have an independent audit committee. This would provide reporting companies with the time required to recruit, elect and appoint to the audit committee properly qualified individuals who meet the heightened independence standards of the Proposed Rules. In addition, the Commission should consider creating a de minimis exception for the receipt of fees by audit committee members or their firms or exempt additional business arrangements from the prohibition. Finally, the Commission should provide better definitional guidance regarding the auditor oversight role the audit committee is expected to take. We thank you for the opportunity to comment on this important matter. Should the Commission have any questions regarding our comments, please do not hesitate to contact the undersigned.
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