FINANCIAL EXECUTIVES INSTITUTE
September 30, 1999
U.S. Securities and Exchange Commission
As a follow-up to our discussions with the SEC staff in the September 9 Liaison
meeting, FEI’s SEC Subcommittee has examined past FEI positions on
management reports to shareholders and ascertained the current views of the
Committee on Corporate Reporting.
With respect to management including in the annual report a “Report of
Management’s Responsibilities” for internal controls and the financial statements,
we strongly support making such reports and have long urged public companies
to do so on a voluntary basis. Most large public companies do in fact make such
We also support having a requirement for public companies to make such
reports, subject to considerations of how such reports might best be made to
provide important benefits at reasonable costs.
We think any requirement for such a report should outline the elements which
should be present in the report, but should not be prescriptive as to exact
language and format. It is important and useful that each company be permitted
to describe what it does in its own unique language, in much the same way that
the Management’s Discussion and Analysis is done today.
We feel very strongly that there should not be a requirement to have such reports
audited and separately reported on by external auditors. There is already a fully
adequate general requirement for the auditor to read any unaudited information
that is supplied with the financial statements, but is not a part of the financial
statements, to ensure that such information is not inconsistent with the audited
Here are the elements that we think are important to include in a “Report of
1.) Management should affirm its responsibility for the financial statements and
all data presented
2.) Management should affirm its responsibility for a system of internal controls,
provide a concise, general summary of how it addresses this responsibility,
and present its view as to whether the system in place provides reasonable
assurance that access to assets occurs in accordance with management’s
authorizations and that transactions are appropriately recorded in the books
3.) The report should be signed by the Chief Executive Officer and the Chief
Financial Officer and/or the Chief Accounting Officer.
Management should not be required to attest that “controls are effective as of a
certain point in time or during a certain period” or make any other definitive
statement that does not include the concept of reasonable assurance.
We believe that a review of the annual reports of larger public companies will
show that there are many effective and informative approaches that companies
are using to make “Report of Management” communications to shareholders and
other users. A requirement to include a report of management, coupled with the
flexibility to portray each company’s unique circumstances, can provide a
significant benefit in the public financial reporting process.
Attached for your information is a past position that FEI has expressed to the
SEC on the subject of management reports, along with voluntary guidelines we
first published for our FEI members many years before.
The CCR SEC Subcommittee of FEI appreciates this opportunity to provide input
on the subject of management reports, and will be pleased to provide further
information as may be needed.
Vice President – Technical Activities
Financial Executives Institute
PREVIOUS FEI POSITION
October 20, 1988
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Re: File No. S7-14-88: Release No. 33-6789, Report of Management’s
The Committee on Corporate Reporting (CCR) of Financial Executives Institute
(FEI) appreciates the opportunity to comment on the subject release. Since
1978, FEI has urged the voluntary inclusion in annual reports of reports of
management similar in many respects to the reports which are now proposed to
be required of SEC registrants. FEI also supports the Treadway Commission
recommendation in this respect. We therefore support the SEC proposal to
require reports of management’s responsibilities, although with some important
provisos and exceptions.
The most important proviso to our support of the proposed requirement is our
opposition to including management’s responses to auditors’ internal control
recommendations, because of the potential for significantly higher audit costs if
auditor review of internal controls is increased. We agree that the management
report will tend to further the Commission’s stated objectives of improved public
understanding of the respective roles of management and the independent
accountant, and perhaps heighten the awareness of senior management of its
responsibilities. However, we are greatly concerned that the measurable costs of
auditor involvement could greatly exceed these unquantifiable benefits unless the
final SEC release clearly indicates that the SEC intends no auditor involvement
beyond that envisioned in SAS No. 8 – “Other Information in Documents
Concerning Audited Financial Statements”. Specifically, quoting from the SEC
“SAS No. 8 requires the independent accountant to read other information,
such as the proposed management report, in a document containing
audited financial statements, and consider whether such information, or
the manner of its presentation, is materially inconsistent with information
appearing in the financial statements. Further, this SAS requires that the
independent accountant also consider whether such other information is a
material misstatement of fact (even though not inconsistent with the
financial statements). This responsibility extends to a material
misstatement that results from management’s failure to disclose a fact
necessary to make the statements made regarding internal control not
misleading. However, SAS No. 8 indicates that the independent
accountant has no obligation to perform any procedures to corroborate
such ‘other information’.”
The last sentence in the above quotation is inconsistent with the SEC’s proposal
to require reference in the report of management as to how management has
responded to any significant recommendations made by its independent
accountants. The user of financial statements containing a management
representation about auditors’ recommendations concerning internal controls
would be justified in concluding that the auditor has performed much more
extensive evaluations of internal controls than is in fact the case in current
For this reason, and because we find the usefulness of the information highly
questionable, CCR strongly opposes the requirement to include in the
management report responses to auditors’ control recommendations. We would
not object to a requirement that management express its assessment of the
effectiveness of the system of internal controls as they affect financial reporting
directly and provide reasonable assurance as to the integrity of financial
reporting, consistent with the recommendations of the Treadway Commission.
However, to require comment concerning specific control suggestions of the
internal and external auditors would add little if any useful information concerning
management’s assessment. If there had been an inadequate response to such a
suggestion, and it were material, it would raise an SAS No. 8 issue with the
auditor in reviewing management’s statement concerning its assessment of
controls. To require further dissertation in the report of management would be
CCR members’ views vary on the proposal to require that the management
report be signed by the principal executive officer, principal financial officer and
principal accounting officer. We therefore defer to the individual companies’
responses to that issue and its possible liability and other implications. Our
members’ views are also divided on the question whether the proposal may alter
the allocation of liability among auditors, board members, management, the
registrant, and other.
Our comments with respect to the other issues raised in the release are included
in the attachment.
In summary, we support the inclusion of reports of management in annual reports
but have major concerns as to cost effectiveness if the Commission does not
clearly state that auditor involvement beyond SAS No. 8 procedures is not
We would be happy to discuss our views further.
Joseph A. Sciarrino
FEI-Committee on Corporation Reporting
Supplemental Comments on SEC Release No. 33-6789
Following are CCR Comments on the specific questions raised in the subject
release other than those addressed in our cover letter.
1. Commentators are requested to address – whether alternative disclosures
should be required.
We do not believe any alternative disclosures should be required.
To do so could lead to meaningless boilerplate as opposed to
2. Comment is invited on the scope of internal controls encompassed in the
We agree with the scope of internal controls encompassed
3. Comment is specifically invited on the proposed inclusion of a materiality
We agree that any final requirement should include a materiality
threshold with respect to assessment of effectiveness of system of
internal controls. However, we believe the materiality concept in
the proposal is inappropriate for assessment of an internal control
system. A more appropriate criterion would be the definition of a
“material weakness” in SAS No. 60 which is “—a reportable
condition in which the design or operation of the specific internal
controls structure elements do not reduce to a relatively low level
the risk that errors or irregularities in amounts that would be
material in relation to the irregularities in amounts that would be
material in relation to the financial statements being audited may
occur and not be detected within a timely period by employees in
the normal course of performing their assigned functions.”
4. Commentators are encouraged to address whether it would be more
appropriate to require management reporting for the period rather than as
of a point in time and whether it would be more appropriate to permit
reporting at other than fiscal year end as recommended in the Treadway
We believe that point in time reporting is more appropriate in
connection with point in time financial statements. We also believe
the fiscal year end is generally the most appropriate point, but
would allow flexibility to use a point in time near year end.
5. Comment is requested as to whether the Commission should specify any
other items that should be addressed in a management report.
We do not believe any other items should be specified.
6. Comment is requested on whether the Commission should specify
responsibility of the auditor in the event of a noted misstatement in a
Such a specification is unnecessary because the auditor’s
responsibilities are already specified by Interpretation No. 1 to SAS
7. Comment solicited on whether the requirement should pertain only to
Form 10-K rather than the annual report to security holders.
We agree with the proposed scope in this respect. The
requirement should not be limited to the 10-K because, if maximum
benefit is to be derived from the management report, it should be
included in the document most read, the annual report.
8. Comment is requested on whether the requirement should extend to
registration statement for initial public offerings, whether SAS No. 8
procedures should apply thereto, whether any category of issuers should
be exempted, whether the proposed requirements should apply to foreign
private issuers and to registered investment companies, and whether
capital formation would be impacted.
We believe the requirements should extend to all registrations and
that none should be exempted. Acknowledgement of management
responsibilities and assessment of internal controls may be of
particular value in IPOs. SAS No. 8 procedures should apply. We
do not believe such a requirement would impact the capital
9. Commentators are requested to indicate whether the Commission should
be more or less prescriptive regarding the specific items to be addressed.
We do not believe the Commission should be more prescriptive.
Flexibility will permit management to prepare a more meaningful
10. Comment on whether independent accountants should be required to
report directly in the Form 10-K and annual report, either on internal
control structure of the registrants or the proposed management report.
We believe strongly that such reporting should not be required for
the cost/benefit reasons discussed in our cover letter.
11. Comment on whether the proposed revisions, if adopted, would have any
adverse affect on competition.
We do not believe there would be an adverse effect on competition
if auditor involvement, and hence cost, is not expanded beyond
SAS No. 8 procedures.
GUIDELINES FOR PREPARATION OF A
STATEMENT OF MANAGEMENT RESPONSIBILITY
FOR FINANCIAL STATEMENTS
Financial Executives Institute believes that a statement in the Annual Report
acknowledging management’s responsibility for the preparation of the financial
statements will help to improve the public’s understanding of the respective roles
of management and the auditor. This statement has also been generally referred
to as a "Management Report" or "Management Certificate." We believe such a
statement can provide a convenient vehicle for management to describe the
nature and manner of preparation of the financial information and the adequacy
of the internal accounting controls. Logically, the statement should be presented
in close proximity to the formal financial statements. For example, it could
appear in conjunction with the auditor’s report, or in the financial review or
management analysis section.
Listed below are several subjects which should be considered when preparing a
management report. Obviously, not all of these subjects would be appropriate in
all cases. Also, while the statement should be informative, care should be taken
that any assurances given do not imply a greater degree of accuracy or reliability
than is possible within the inherent limitations of the accounting system.
1. Management responsibility for:
a. The preparation and presentation of the financial statements in
conformity with generally accepted accounting principles
appropriate in the circumstances.
b. Other financial information in the Annual Report, consistent with
that in the financial statements.
c. The quality of the data in the statements.
d. The estimates and judgments required.
2. Management responsibility for maintaining a system of internal accounting
controls* designed to provide reasonable assurance as to the integrity of
the financial records and the protection of assets. Comments on the
control system could include, among other things:
a. Communication of established written policies and procedures.
b. Careful selection and training of qualified personnel.
c. Organizational arrangements that provide an appropriate division of
d. A program of internal audits and appropriate follow-up by
3. Management’s assessment of the effectiveness of the internal accounting
4. Independent public accountant responsibility for:
a. An independent examination conducted in accordance with
generally accepted auditing standards.
b. An expression of an opinion as to whether the financial statements
fairly present the financial position, operating results, and changes
in financial position.
5. The Board of Directors (and its independent Audit Committee)
a. Seeing that management fulfills its responsibilities in the
preparation of the financial statements, and for engaging the
independent public accountant.
b. Composition of the Audit Committee and related independence of
c. Periodic meetings with the representatives of the independent
public accountant and management to discuss auditing and
financial reporting matters.
d. Assuring that independent auditors have full and free access to
meet with the Audit Committee, without management present, to
discuss the results of their examination, their opinions on the
internal accounting controls, and the quality of financial reporting.
6. Other matters management may feel are appropriate to discuss, such as:
a. Reference to any change in independent auditors.
b. Reference to ethical and legal policies for domestic and
international business activities.
c. Reference to the corporation’s social responsibilities.
d. The significance of uncertainties.
7. The signature of the Chief Financial and/or the Chief Executive Officers
may add stature to the statement.
*FEI members should consult legal counsel regarding the provisions of the
Foreign Corrupt Practices Act of 1977.