Shareowner proposal submitted to SONICblue on November 24, 2000:


WHEREAS auditor independence of Company management helps guarantee the integrity of financial statements;

WHEREAS auditor selection by Company management may compromise auditor independence of Company management;

THEREFORE SONICblue shareowners request the Board of Directors to have the auditor selected annually by shareowner vote. To insulate auditor selection from influence by Company management, any qualified auditing firm could put itself on the ballot. Shareowners request the Board to take all necessary steps to enact this resolution in time to hold the first such vote at the year-2002 shareowner meeting.

Supporting Statement:

Wall Street Journal, October 25, 2000: "SEC Chairman Arthur Levitt believes that new standards are needed to maintain investor confidence in the reliability and accuracy of audited financial statements of public companies. Independence, he has said, could be compromised if audit partners are concerned about losing lucrative consulting business. Without safeguards, audit partners might lose objectivity when reviewing work done by consulting affiliates, the SEC has argued."

The Economist, October 28, 2000: "There is plenty of evidence that financial statements often fail to come up to scratch. The number of companies restating their accounts—never in ways that make them appear healthier—has been rising so fast as to have become almost commonplace. Well-known firms whose audited profits shrunk in a restatement include Waste Management, Sunbeam and CUC International, during its merger with Cendant. Investors have lost billions of dollars, and much of their faith in auditors."

In the current system, management chooses the auditor, and shareowners merely rubber-stamp that choice. Under this proposal however, shareowners would choose (by vote) among several auditing firms competing for the position. This would encourage auditors to build their reputations in the eyes of investors rather than in the eyes of management, creating new pressure for higher standards. Investors could decide how important auditor independence is to them, and how it should be assessed.

The average investor may seem ill-equipped to make such assessments on her own. But she would not make them on her own. She would benefit from consensus-building discussion by the entire investment community, including proxy advisory firms. It is much easier to assess reputations of auditors than of board members, because there are only a handful of auditing firms, versus hundreds of board candidates for a diversified portfolio of stocks over the years.

As with other voting items in the proxy, management would presumably make a recommendation on which auditor to choose. Even if the management-recommended auditor is never voted out, a rising percentage of opposition votes would provide a healthy early warning to the auditor, that its reputation is slipping and corrective action is required.

This is not to imply that there are accounting biases at SONICblue in particular, but no one knows when and where problems may occur. This proposal would create a competitive market for auditor reputation. Investors would be given the power and flexibility to determine standards of auditing services that best meet their needs.

Further information on this proposal: