FINANCIAL EXECUTIVES INSTITUTE

                                         September 30, 1999


Lynn Turner
Chief Accountant...
Here are the elements that we think are important to include in a “Report of
Management”

1.) Management should affirm its...
PREVIOUS FEI POSITION


                                               October 20, 1988

Mr. Jonathan G. Katz
Secretary
Se...
financial statements).     This responsibility extends to a material
       misstatement that results from management’s fa...
We would be happy to discuss our views further.

                                              Sincerely yours,

         ...
FEI-Committee on Corporation Reporting
           Supplemental Comments on SEC Release No. 33-6789


Following are CCR Com...
the fiscal year end is generally the most appropriate point, but
           would allow flexibility to use a point in time...
10.   Comment on whether independent accountants should be required to
      report directly in the Form 10-K and annual r...
GUIDELINES FOR PREPARATION OF A
              STATEMENT OF MANAGEMENT RESPONSIBILITY
                     FOR FINANCIAL ST...
c.    Organizational arrangements that provide an appropriate division of
           responsibility.

     d.    A program...
d.     The significance of uncertainties.

7.    The signature of the Chief Financial and/or the Chief Executive Officers
...
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October 20, 1988

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October 20, 1988

  1. 1. FINANCIAL EXECUTIVES INSTITUTE September 30, 1999 Lynn Turner Chief Accountant U.S. Securities and Exchange Commission Dear Lynn: 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 reports today. 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 financial statements. 1
  2. 2. Here are the elements that we think are important to include in a “Report of Management” 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 and records. 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. Sincerely, Susan Koski-Grafer Susan Koski-Grafer Vice President – Technical Activities Financial Executives Institute 2
  3. 3. PREVIOUS FEI POSITION October 20, 1988 Mr. Jonathan G. Katz Secretary 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 Responsibilities Dear Sir: 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 release: “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 3
  4. 4. 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 practice. 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 overkill. 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 required. 4
  5. 5. We would be happy to discuss our views further. Sincerely yours, Joseph A. Sciarrino JAS/afc Attachment 5
  6. 6. 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 meaningful commentary. 2. Comment is invited on the scope of internal controls encompassed in the proposed rule. We agree with the scope of internal controls encompassed proposal. 3. Comment is specifically invited on the proposed inclusion of a materiality threshold. 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 Commission report. We believe that point in time reporting is more appropriate in connection with point in time financial statements. We also believe 6
  7. 7. 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 management report. Such a specification is unnecessary because the auditor’s responsibilities are already specified by Interpretation No. 1 to SAS No. 8. 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 formation process. 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 report. 7
  8. 8. 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. 8
  9. 9. 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. 9
  10. 10. c. Organizational arrangements that provide an appropriate division of responsibility. d. A program of internal audits and appropriate follow-up by management. 3. Management’s assessment of the effectiveness of the internal accounting control system.* 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) responsibility for: 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 its members. 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. 10
  11. 11. 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. 11

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