Office of the Chief Accountant:
September 2000 Letter to the Public Oversight Board regarding Independence Look-Back Testing Program
September 13, 2000
Charles A. Bowsher
Public Oversight Board
One Station Place
Stamford, CT 06902
Dear Mr. Bowsher:
As you recall, in my letter dated December 9, 1999, I alerted the POB that prompt additional action was needed to be taken by the SEC Practice Section ("SECPS") of the American Institute of Certified Public Accountants ("AICPA") 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. I asked that the POB undertake a special review of SECPS member firms' current compliance with the SEC and profession independence rules.
In light of the actions by several firms and the AICPA in cutting off funding for the POB's lookback program, the SEC staff negotiated the "Term Sheet for Independence Look-Back Testing Program" (the "Term Sheet").
The Term Sheet requires participating firms, in part, to continue to implement the systems, procedures, and internal controls relating to independence set forth by the Commission's Chief Accountant, in letters to Michael Conway, Chairman of the SECPS Executive Committee, dated December 9, 1999 and May 1, 2000, with implementation to be completed no later than January 1, 2001.
We now ask that the POB, in lieu of the special review requested in my December 9th letter to you, undertake the oversight described in the attached Term Sheet and set forth below regarding systems and controls:
- Firms would submit to review and oversight by the POB of the effectiveness of the design and implementation of these systems, procedures, and internal controls, and to testing by the peer reviewers or the POB of their effectiveness.
- If the testing is performed by a peer reviewer, the POB shall have oversight of the peer review. Firms would agree to cooperate with the POB in such review and oversight.
In performing the review and oversight of the effectiveness of the design and implementation of these systems, procedures and internal controls, you have informed us that the POB's law firm and an independent consultant, having expertise in systems design and implementation, shall conduct the oversight review. If testing is performed by peer reviewers, the POB shall agree to the nature and scope of the procedures to be performed.
The POB would also issue two separate public written reports with respect to:
(i) the effectiveness of the design and implementation of these systems, procedures, and internal controls as of January 1, 2001, and
(ii) the testing and evaluation of their operating effectiveness during the six- month period ending June 30, 2001. Such reports will not disclose violations.
The staff would appreciate a briefing on how the POB will undertake to complete this project and its expected timetable, once it has been determined. The staff also requests prompt notification if the SECPS or any of its member firms object to the funding of the POB for this project.
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
cc: William Allen, Esq., Chairman
Independence Standards Board
David A. Costello, President and Chief Executive Officer
National Association of State Boards of Accountancy
Michael Conway, Chairman
SEC Practice Section Executive Committee