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U.S. Securities and Exchange Commission

Letter From the Chief Accountant:
Issues related to Independence/Quality Control to SEC Practice Section (III)

May 1, 2000

Michael Conway
SEC Practice Section Executive Committee
C/o KPMG Peat Marwick, LLP
1222 Park Avenue
New York, N.Y. 11001

Dear Mr. Conway:

We appreciate and support the steps being taken by the SEC Practice Section ("SECPS" or "Section") and its members to require and implement controls consistent with the December 9, 1999 letter from the staff of the Securities and Exchange Commission (the "staff"). We look forward to the reports of the SECPS and Public Oversight Board on the progress of the Section’s efforts in this important area.

As I have discussed with Susan Coffey, we would also like to make you aware of a growing number of additional independence issues that have come to our attention since our previous letter. These issues involve additional areas of non-compliance with the independence rules of the profession and/or the SEC. Accordingly, we request that as the SECPS and its members are adopting and implementing new control procedures, SECPS member firms review and where necessary improve their policies and controls to ensure that their firm and foreign affiliates are in compliance with all the independence rules including the following specific independence guidance as it relates to domestic registrants (including their foreign operations) or to foreign private issuers:

  1. Contingent fees–Firms should not enter into prohibited contingent fee arrangements with attest clients, including but not limited to, those used in capital sourcing, financial advisory services, corporate finance services, and to tax services other than the limited exceptions allowed in the literature. See ET section 302 of the AICPA Professional Standards.
  2. Bookkeeping–Firms should not participate, either manually or through their computer services, in maintenance of the basic accounting records of their SEC audit clients, including payroll and preparation of the financial statements, or perform other accounting services through which the firm participates with management in operational decisions. See section 602.02.c of the Codification of Financial Reporting ("CFR"), Bookkeeping and Related Professional Services and ET § 101.5 of the AICPA Professional Standards.
  3. Former Partners–Firms should promptly settle all financial interests of former partners or members of a CPA firm who have taken a position as an officer of a client of the firm. See CFR section 602.02.f. Retired Partners and the related no-action letters.
  4. Executive Search–Firms should not violate the SECPS membership requirements that prohibit, among other services, providing executive search services to SEC registrants. See SECPS §1000.35 Appendix A–Executive Recruiting and Insurance Actuarial Services.

The SEC staff strongly supports Independence Standards Board No. 1, Independence Discussions with Audit Committees, and believes that violations of the independence rules noted above should generally be reported to the audit committee. In addition, your members should be aware that Item 509 of Regulation S-K requires disclosure of direct or indirect financial interests of experts, including accountants, named in a filing.

Please call John Morrissey or Scott Bayless at (202) 942-4400 if you have any further questions regarding this letter.


Lynn E. Turner
Chief Accountant

cc:    William Allen, Esq., Chairman Independence Standards Board
  David A. Costello, President and Chief Executive Officer National Association of State Boards of Accountancy
  Charles A. Bowsher, Public Oversight Board

Earlier letters on this topic available:


Modified: 06/06/2000