November 25, 2003

Transcript of “Internal Controls and

For members, we have posted the transcript from last week’s popular webcast with John Huber and Teri Iannaconi on internal controls and attestations.

Congressional Report on Mandatory Rotation of Auditors

On Friday, the GAO submitted its report to Congress (as required by SOX) regarding the potential effects of mandatory rotation of auditors. Based on surveys of large accounting firms and public companies (as well as interviews with other stakeholders), the report states that more experience with SOX reforms is needed before the full effect of SOX’s requirements can be assessed – and therefore the SEC and PCAOB should monitor and evaluate the effectiveness of existing requirements.

In my mind, mandatory rotation of audit partners is what is needed (and what we now have under new SOX rules) and that rotation of the firms themselves could very well lead to more opportunities for corporate fraud as auditors will have less incentive to work hard near the end of their rotation – and not possess an abundance of knowledge about clients at the beginning of rotations.

The Debate Over Shareholder Access

Last month, Harvard Law School sponsored six panels – with very notable participants – that debated various aspects of shareholder access. Two transcripts of these debates are now available (the first three panels – and the second three panels). We have added these transcripts to our rapidly growing “Shareholder Access Portal.”

Note that the SEC posted its adopting release on disclosure of nominating committees/shareholder communications late yesterday – and that I amended yesterday’s blog about “effective date” issues for 9/30 companies.

NASD Proposes IPO Rules

Following up on some of the recommendations of NYSE/NASD IPO Advisory Committee issued in May, the NASD proposed rules yesterday that would:

– Require the lead managing underwriter to disclose indications of interest and final allocations to the issuer’s pricing committee;

– Prohibit acceptance of market orders to purchase IPO shares in the aftermarket for one trading day following an IPO;

– Impose procedures designed to ensure that reneged IPO allocations are not used to benefit favored clients of the underwriter;

– Require that any lock-up that applies to shares owned by the issuer’s officers and directors also applies to shares they purchase in “friends and family” programs; and

– Impose new notification requirements when underwriters waive lock-ups.

The NASD also proposed additional regulatory steps that would promote transparency in IPO pricing, such as requiring underwriters to:

– Retain an independent broker/dealer to opine that the initial IPO price range at which the offering is marketed and the final offering price are reasonable and to require that the independent broker/dealer’s opinion is disclosed in the prospectus;

– Use an auction or other system to collect indications of interest to help establish the final IPO price; or

– Include a “valuation disclosure” section in the prospectus with information about how the managing underwriter and issuer arrived at the initial price range and final IPO price, such as the issuer’s one-year projected earnings or P/E ratios and share price information of comparable companies.