Letter From the Chief Accountant:
Issues Related to Independence/Quality Control to Public Oversight Board
December 9, 1999
Charles A. Bowsher
Public Oversight Board
One Station Place
Stamford, CT 06902
Dear Mr. Bowsher:
I am writing to inform you of my views on the recent actions of the SEC Practice Section ("SECPS") to upgrade its membership requirements in an effort to better safeguard the independence of audit firms as to their publicly reporting audit clients and to urge the Public Oversight Board ("POB") to take prompt and tangible steps to further safeguard the public interest.
As you may be aware, nearly a year ago, the SEC staff expressed concern to the SECPS that firms with public company audit clients practicing before the Commission may lack sufficient worldwide quality controls to assure their independence from audit clients under the applicable Commission and professional rules. Since that time, the SEC staff has identified additional, troubling examples that suggest not only a lack of sufficient global safeguards, but also a systematic failure by professionals within certain firms to adhere to even their own firm's existing controls.
Please find attached a letter that I have sent to the SECPS expressing the SEC staff's belief that, while the new membership requirements are an improvement and initial step in the right direction, prompt additional action is needed both to evaluate the nature and the extent of the existing deficiencies in internal controls and oversight on a profession-wide basis, and to develop a more comprehensive remedial solution. In that letter, I expressed the SEC staff's belief that failure by the SECPS to take action quickly could seriously undermine public confidence in the current self-regulatory process and its dependence on internal controls of member firms and external peer review.
In view of the importance of these matters to the investing public, I am asking that the POB oversee the actions of the SECPS in responding to these concerns and the installation and operation of the systems discussed in the attached letter.
The Need for an Intensive Profession-Wide Evaluation
of Independence Compliance
We also urge the POB to undertake promptly a review of the adequacy of its peer review process as it relates to testing of compliance with the Commission's and profession's independence requirements and quality controls. This testing needs to be rigorous and should test the design and effectiveness of internal controls, including testing of compliance by individual professionals with those controls.
We are concerned, for example, that the most recent letter of public comment issued in connection with the peer review of Coopers & Lybrand stated, "[t]he Firm has extensive, appropriate policies regarding independence (emphasis added). However, we noted several instances of noncompliance with respect to notifying an office's professional personnel of new clients of the office before work begins. The notifications subsequently were made, and no instances were noted where the Firm was not independent."
The Commission's January 1999 Order involving PricewaterhouseCoopers (AAER No. 1098), together with the observations of the peer reviewer noted above and several other instances of violations of auditor independence rules by other firms indicate that the peer review process as it relates to testing of controls over compliance with independence matters is inadequate or is not working properly. The compliance tests of peer reviews currently underway or about to be undertaken should be adjusted accordingly.
Finally, and most importantly, in light of these developments and in order to promote public and regulatory confidence in the profession's reliance on peer review and internal controls, we strongly recommend that the POB undertake a special review of SECPS member firms' current compliance with SEC and profession independence rules. The independence, integrity, and objectivity of the auditor are fundamental to maintaining the credibility of the profession and the special role it plays in the capital markets.
The staff believes that this broader study is warranted to ensure that the existing independence rules of the profession and the SEC are, in fact, being complied with. The findings and recommendations arising from such an investigation will hopefully result in a comprehensive assessment of any existing deficiencies of profession-wide internal controls and peer review thus leading to appropriate corrective action. Of course, as you consider how to implement such a review, we would suggest that representatives of the POB and the Commission staff meet soon to ensure that this endeavor results in the highest level of public confidence.
If you have any questions regarding the matters raised in the letter or wish to arrange a meeting, you may contact Scott Bayless, Robert Burns or the undersigned at (202) 942-4400.
Lynn E. Turner
||William Allen, Esq., Chairman Independence Standards Board
||David A. Costello, President and Chief Executive Officer National Association of State Boards of Accountancy