EMMIS COMMUNICATIONS CORPORATION
40 Monument Circle, Suite 700
Indianapolis, IN 46204
November 13, 2002
Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-40-02
Disclosure Required by Sections 404, 406
and 407 of the Sarbanes-Oxley Act of 2002
Dear Mr. Katz:
I am writing as Chief Executive Officer of Emmis Communications Corporation to offer comments in response to the proposals of the Securities and Exchange Commission in Release No. 33-8138; 34-46701; IC-25775. Specifically, I am concerned about the Commission's proposed requirement that a "financial expert" have, through experience as a public accountant or auditor or a principal financial officer, controller or principal accounting officer of a public company or "performance" of similar functions, experience with internal controls and in preparing or auditing comparable financial statements. I believe this definition is drawn more narrowly than necessary to accomplish the results Congress sought to achieve in the Sarbanes-Oxley Act of 2002 and if adopted as proposed will work a hardship on smaller public companies.
I note that in formulating its definition of a financial expert the Commission has gone beyond the Congressional mandate in Section 407(b) of Sarbanes-Oxley to "consider" an audit committee member's experience in preparing audited financial statements of comparable issuers and has simply adopted without significant change the language in the Act. In so doing, the proposed rules would impose a far more restrictive test than, for example, the current Nasdaq listing requirements, which require one member of the audit committee to have had "past experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual's financial sophistication . . . ." Recognizing the narrowness of its proposed definition, the Commission invited comment on whether "experience reviewing or analyzing" financial statements should suffice for qualification as a financial expert. I believe it should.
While the proposed rule is styled as a disclosure standard and appears to afford a board of directors the opportunity to determine that an individual is a financial expert because of "similar expertise and experience" to that specified, the practical reality is that a board of directors would face a heavy burden of explanation - and the company would likely suffer criticism in the market - if the board chose to depart from the Commission's enumerated criteria. Accordingly, most of the thousands of public companies that do not now have an individual with hands-on auditing experience on their audit committees will be forced to compete for the relatively limited supply of candidates who qualify as a "financial expert" in the company's industry and would be qualified, contributing members of the board of directors. I fear that in such a competition, smaller companies such as Emmis would be at a disadvantage and would be forced in many cases to accept a candidate who met the Commission's standards for a financial expert but would not otherwise be chosen as qualified for the company's board of directors. Indeed, the irony is that a company could satisfy the Commission's definition with a junior-level auditor from a public accounting firm but not with an experienced investment banker or venture capital investor or a chief executive officer from another public company. Clearly, the best interests of the investing public are not served by such a result.
Congress recognized in the Sarbanes-Oxley Act that the role of a company's audit committee is to monitor the performance of the company's independent auditors and internal accountants, rather than to micromanage the audit itself or function as internal accountants for the company. Similarly, in describing the oversight function of an audit committee, the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees, cited by the Commission in its release, cautioned that an audit committee "is neither intended nor equipped to guarantee with certainty to the full board and shareholders the accuracy and quality of a company's financial statements and accounting practices" and that financial reporting, accounting, and audit functions should instead be "conducted by full-time professionals dedicated to these purposes." As such, it is more important for the protection of shareholders and the integrity of the financial markets that audit committee members understand the meaning and importance of the financial information presented to them than that they be able to prepare audited statements themselves. Thus, I urge the Commission to broaden its definition of a "financial expert" to include individuals with experience in reviewing or analyzing financial statements.
Sincerely,
Jeffrey H. Smulyan
Chief Executive Officer, President
& Chairman of the Board
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