Office of the Chief Accountant:
Regarding Auditor Independence
Correspondence With Elms, Faris & Company

May 30, 1996 Letter from Elms, Faris & Company

ELMS, FARIS & COMPANY
CERTIFIED PUBIC ACCOUNTANTS
A Professional Corporation

May 30, 1996

Mr. Scott Bayless
Assistant Chief Accountant
Securities and Exchange Commission
450 5th Street
Northwest Stop 11-3
Washington, D.C. 20549

Dear Mr. Bayless:

Pursuant to our May 29, 1996 telephone conversation, you requested additional information with regard to independence issues concerning audit services that we performed for our client (the "entity") for the years ended 1994 and 1993.

Below represents certain information from audited financial statements of the entity on which unqualified opinions were issued:

	1994	1993
Total Assets	$24,904,403	$13,289,650
Gross Revenue	$8,116,665	$4,616,146
Gross Wages	$779,640	$417,561

The gross wages above represent only the gross wages in which the information was compiled by the separate payroll service company. All wages are reflected in General and Administrative expenses in the Statement of Income of the entity. |

In addition, in July 1995 the entity acquired income producing assets for a purchase price in excess of $53,000,000. As a result of this purchase, total assets for the year ended 1995 were $87,367,000 and gross revenue for the year 1995 exceeded $21,800,000. The gross revenue of properties acquired for the calendar year 1995 was $24,246,000. This represents a very significant part of the overall financial position of the entity. An audit firm of national recognition performed audit services for the year ended 1995 as well as performing an audit on the revenue and direct operating expenses on the properties acquired during 1995.

The payroll service company is a distinct and separate company duly organized and chartered under the laws of the State of Texas. The stockholders of the payroll service company and the audit firm maintain the same ownership percentages in each company.

The audit firm now engaged to audit the entity for the year ended 1995 plans to rely on our work to the extent of establishing opening balances. The entity plans to include financial statements audited by our firm, for the years in question, in their registration statement.

Under rule 602.02.c of the Codification of Financial Reporting policies, we believe that our audit firm should be considered independent for the following reasons as set forth below:

a) the recordkeeping performed by the payroll service company was limited in extent and mechanical in nature; the service performed was strictly computerized input of payroll information received from the entity; we maintained no check signing authority, performed no verification of any information received or any other management function;

b) as shown in the preceding paragraphs, the amount of the entity's gross wages were not material when compared either to gross revenue or total assets for the periods covered by our audit reports, and are clearly immaterial when compared to the entity's present financial condition;

c) if our firm is deemed to be not independent under the Commission's recordkeeping prohibition, the entity will then be required to be re-audited for the two years in question; due to excessive costs and extensive time constraints, such a determination will cause an unreasonable hardship on the company, which is attempting to file an initial public offering in June 1996; and

d) there is no question as to independence of the audit firm now engaged to perform audit services in the latest full year (1995).

As a result, we believe that the Commission should not raise a question as to independence regarding the earlier periods audited.

We appreciate your prompt attention to this matter. If you have any further questions please contact either of the undersigned.

Very truly yours,

ELMS, FARIS & COMPANY, P.C.

Larry Edgerton
Partner

Kirk Dunnam
Audit Manager

Reply

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549

June 7, 1996

Mr. Larry Edgerton, Partner
Elms, Faris & Company, P.C.
400 W. Illinois, Suite 1550
Midland, Texas 79702

Dear Mr. Edgerton:

In your letter dated May 30, 1996, you requested the staff's views regarding the effect of the provision of certain payroll services on the independence of Elms, Faris & Company, P.C. ("the Former Auditor") with respect to the audit of the financial statements of your Former Audit Client for the years ended December 31, 1993 and 1994. The Former Audit Client intends to become a public company in connection with a registration statement on Form S-1 to be filed with the Commission which will include such financial statements, as well as the financial statements for the year ended December 31, 1995 audited by the firm of KPMG Peat Marwick LLP ("the Successor Auditor").

In the situation described, the partners of the Former Auditing Firm own a separate company that provides payroll services to the Former Audit Client. Due to the fact that the stockholders of the payroll service company and the audit firm maintain the same ownership percentages in each company, the staff considers both entities, for the purposes of this letter, as the Former Auditor. In this case, the Former Audit Client provided hours worked, pay rate, changes in withholding and other master file changes for each employee to the Former Auditor. The Former Auditor used this information to generate a payroll journal and write individual payroll checks. The unsigned checks and payroll journal were sent to the Former Audit Client to be signed and distributed. The Former Auditor also prepared periodic payroll tax reports. However, the Former Auditor did not prepare a standard monthly journal entry to record payroll activity, did not make judgmental account allocations, nor make any entry to the general ledger. The Successor Auditor has not provided any of these services to the Former Audit Client, and you are not aware of any questions regarding the independence of the Successor Auditor with respect to the audit of the financial statements of the Former Audit Client for the year ended 1995.

Section 602.02.c of the Financial Reporting Codification includes the Commission's views regarding the effect of the provision of bookkeeping and related professional services on an accountant's independence. Generally, an accountant is precluded from exercising judgment in the initial determination of the appropriate principles and methods applicable to the recording, classification and presentation of financial data and from preparing documents that will become part of the client's basic accounting records. Also included in that section is a limited exemption from strict application of the bookkeeping prohibition in cases involving first time registrants, where the bookkeeping services provided by the accountant were of a limited and mechanical nature and were not provided during the most recent fiscal year

In view of the fact that the services provided to the Former Audit Client involved payroll processing that was limited and mechanical in nature, and that the most recent year's financial statements will have been audited by the Successor Auditor, the staff will not question the independence of Elms, Faris & Company, P.C , with respect to its audits of the financial statements of the Former Audit Client for the years ended 1993 and 1994.

Because the staff's decision is based upon the representations made to the staff by the Former Auditor, it should be noted that any different facts or conditions might require a different conclusion. In connection with your request, please provide the staff supplementally in writing with the name of the Former Audit Client.

Sincerely,

W. Scott Bayless
Assistant Chief Accountant

http://www.sec.gov/info/accountants/noaction/aaelmsfa.htm