Comments of Transparency Internatinal-USA on S7-21-02

Transparency International-USA
The Coalition Against Corruption
1112 16^th Street, N.W., Suite 500, Washington, D.C. 20036
Tel: 202-296-7730 Fax: 202-296-8125 tiusa@aol.com www.transparency-usa.org

August 19, 2002

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609

Commission File No. S7-21-02
Certification of Disclosure in Companies' Quarterly and Annual Reports Release No. 34-46079 and No. 34-46300

Dear Mr. Katz:

Transparency International-USA (TI-USA) is pleased to comment on the above referenced proposed rules and will follow with interest and comment on additional SEC rule proposals to implement the Sarbanes-Oxley Act of 2002 ("the Act"). TI-USA supports the SEC's efforts to improve the quality and transparency of disclosure.

We have enclosed a copy of TI-USA's July 22 statement on corporate governance and accounting reform, submitted to the House-Senate conference committee considering reform legislation. We urge the SEC to consider this statement as the SEC proceeds with the rule-making process since the recommendations contained in this statement parallel many of the requirements of the Act.

TI-USA supports proposed rules implementing the Sarbanes-Oxley Act requirements that senior management certify in each annual or quarterly report that:

they are responsible for establishing and maintaining internal controls;
the controls are designed to ensure that material information is made known;
they have evaluated the effectiveness of the internal controls;
they provide an assessment of the effectiveness of the internal control structure and procedures in each report; and,
they have disclosed to the auditors and audit committee any significant deficiencies in internal controls which could adversely affect reporting financial data and have identified any material weaknesses in internal controls.

The Act recognizes that an effective internal control system is fundamental to reliable financial reporting. Such a system is also fundamental to ensure compliance with applicable laws and regulations. As the SEC develops the proposed certification rules (Release No. 34-36079 and No. 34-46300) and other rules to implement the Act, TI-USA recommends that the SEC ensure that both these objectives are clearly identified as objectives of an internal control system.

This recommendation is consistent with the September 1992 report of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) which defines internal control as "a process, effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

- Effectiveness and efficiency of operations
- Reliability of financial reporting
- Compliance with applicable laws and regulations."

Certain components of internal control frameworks are particularly effective in the prevention of illegal acts. They include: setting the "tone at the top," making top management of a company responsible for establishing and maintaining an effective internal control system with appropriate oversight by corporate monitoring bodies; adopting a Code of Conduct and related training programs, which provide information and guidance to those within a company about the company's philosophy toward ethical business conduct and the basic principles governing that conduct; and establishing processes to monitor compliance with policies and procedures that are implemented to prevent and/or detect illegal acts.

We recommend the SEC, through its proposed rules, regulations and interpretations thereof, include as an identified element of an internal control system processes to monitor compliance with applicable laws and regulations. The rule or interpretation does not have to be prescriptive as to the form but should provide guidance as to the distinct but overlapping elements that constitute an internal control system and should ensure that all the necessary elements are explicitly addressed.

From TI-USA's perspective, it is essential for companies to have effective internal controls, including anti-bribery compliance policies and procedures. Adoption of the necessary rules in the US would serve as a model for similar reform efforts that are needed in other countries. The recommendations that TI-USA submitted to the OECD as part of the accounting, auditing and internal control review of US enforcement of the OECD Anti-Bribery Convention are similar in many respects to the legislative and regulatory reforms currently underway in the US.

We would be pleased to discuss the attached statement with the Commission or its staff at your convenience.

Fritz Heimann, Chairman
Transparency International-USA

Thomas L. Milan, Director
Transparency International-USA

cc. Harvey L. Pitt, Chairman
Paul Atkins, Commissioner
Roel Campos, Commissioner
Cynthia A. Glassman, Commissioner
Harvey J. Goldschmid, Commissioner

TI-USA Statement on Corporate Governance and Accounting Reforms

Transparency International is an international anti-corruption organization headquartered in Berlin, Germany, with over 80 chapters promoting transparency and accountability in government and the private sector worldwide. In TI's view, US corporate governance and accounting scandals have impaired US leadership and raised questions about the US system as a model for disclosure and ethical business practices. They have made it more difficult for the United States to promote good governance internationally and serve as an excuse for countries resisting action to reform corporate governance and strengthen regulatory oversight.

Prompt, effective reform here at home is indispensable to US credibility abroad. The United States is setting an example by acknowledging weaknesses in its system. Adoption of needed reforms would serve as a model for similar reform efforts which are also needed in other countries.

The true test will be whether, over the next few months, the Administration, Congress, regulators, stock exchanges and key players in the private sector -- corporations, accountants, lawyers, securities analysts, underwriters and rating agencies -- actually take meaningful steps to strengthen integrity and accountability. Legislation is necessary for some aspects of reform, for example to ensure that the SEC has the appropriate legal basis to act. The Justice Department and SEC should forcefully prosecute offenders, and Congress should provide adequate resources for them to do so. At the same time, companies, listed and non-listed, must direct their efforts at ensuring an ethical corporate culture, going beyond the letter of the law and providing incentives that reward compliance, transparency and accountability.

From TI's perspective, it is essential for companies to have effective internal controls and for there to be strong, consistent international systems for corporate accounting and auditing. Transparency International-USA urges prompt action on the following:

Corporate Governance:

Companies should adopt effective corporate compliance programs, covering compliance with laws and regulations and with ethical standards. Such programs should have the active support and participation of senior management and be provided with adequate resources. Compliance programs should include training requirements, procedures for reporting illegal or unethical behavior, and strong monitoring and enforcement mechanisms.
Oversight over corporate compliance programs should be vested in an audit or governance committee comprised entirely of directors who are independent of management. This committee should have the requisite authority, expertise, time and support to carry out its mandate.
SEC should require companies to include in their annual reports an assessment by management, reviewed by the audit committee, of the adequacy of internal controls, including corporate compliance processes.
Companies should establish an internal audit function with a reporting channel directly to the audit committee. Among its responsibilities should be monitoring compliance programs and ensuring the adequacy of internal controls.

Accounting and Auditing:

SEC should require CEOs and CFOs to certify the accuracy of financial statements and disclosures in periodic reports. CEOs and CFOs should be subject to criminal penalties for misleading auditors or the public.
US generally accepted auditing standards should require auditors to treat a significant deficiency in corporate compliance processes as a matter reportable to the audit committee.
The audit committee should be comprised entirely of directors who are independent of management, and it should have the requisite authority, expertise, time and support to carry out its mandate. It should have sole responsibility for the selection of outside auditors, for their compensation, and for the scope of their duties; the auditors should report to the audit committee. The audit committee should ensure that auditors are independent and not impaired by conflicts of interest, including placing restrictions on hiring of external auditors by the company.
Congress should create an independently-funded public oversight board for the accounting profession, operating under the aegis of the SEC. The board should have confidentiality privilege and be protected against liability. It should have the power to set ethics standards and independence requirements, including conflict of interest rules, to conduct quality control reviews of firms, and to impose penalties. In addition, the public oversight board should have responsibility for setting auditing standards, which may be delegated to an expert body over which it has oversight.
FASB should be provided with independent funding and the ability to promptly bring rules up to date to respond to changing circumstances. Convergence to a stronger, internationally recognized set of accounting standards is essential. To that end, consideration should be given to achieving the best balance between the IASB principles-based approach and the US GAAP rules-based approach.

Fritz Heimann, Chairman

Nancy Zucker Boswell, Managing Director

July 22, 2002