Via fax: (202) 942-9651
September 21, 2000
Mr. Jonathan Katz, Secretary
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 209549-0609
Reference: Proposed Rule S7-13-00
Dear Mr. Katz:
The International Federation of Accountants (IFAC) would like to make comments on the above-referenced proposed rule.
Many SEC registrants have overseas operations that may be audited by non U.S. based auditors and there continues to be an increase in the number of foreign registrants as the global business community grows stronger. The SEC proposed rules impose requirements limiting services and broadly defining affiliates of an accounting firm. They will apply to foreign auditors, who are also subject to differing requirements designed to protect the public interest in their own countries.
Improvement of audit effectiveness internationally requires the co-operation of national governments, national professional bodies and the international firms. Differing cultures and forms of business structure mean that countries may legitimately have different views on what is in the public interest and what policies and procedures should be in place.
As you are aware, under recent initiatives, IFAC will be setting up a voluntary global regulatory structure for firms that are involved in transnational audits, which would include a peer review process and sanctions for firms that fail to meet the requirements. In addition, our Ethics Committee has issued for comment an Exposure Draft proposing a new framework for independence that we hope to finalize within the near future. A copy of this Exposure Draft has been sent to the SEC.
Based on our committee's work to date, IFAC believes that the provision of other services to audit clients is acceptable provided there is in place a framework requiring the auditor to assess the risks to independence of the service and take appropriate steps to mitigate those risks. These steps would be those which are appropriate under the individual circumstances. There is no evidence that other services have compromised audit quality, or are likely to do so. Therefore, companies should be permitted to receive a high level of informed professional advice from a single and cost-effective source if they choose to do so, provided appropriate safeguards are in place.
The definition of affiliate is so broad that it could be read to encompass virtually any cooperative agreement with others, including accounting and other firms outside the U.S. This is likely to have a chilling effect on international cooperation and business initiatives as well as creating hardship for foreign registrants in countries where the regulatory and business structure schemes may be different than those in the U.S.
We also believe that the disclosure requirements relating to staffing of the audit engagement and other services performed lack clarity. The SEC's preference for certain types of legal firm structure is likely to cause problems for non-U.S. auditors in countries where there are different regulatory and business structures to protect the public interest. There has been no demonstrated evidence that these disclosures would add to the credibility of the auditor's independence or of the financial statements which are opined upon.
We strongly support modernization of independence rules. For this reason, IFAC and the European Federation of Accountants (FEE) have, during the past two years, contributed significant time and other resource to the work of the Independence Standards Board (ISB) Task Force on Developing a Conceptual Framework for Independence. We believe the ISB is taking significant steps towards the development of such a framework and of appropriate rules on specific matters. Such a framework would provide useful guidance to the auditor and others on how to evaluate the wide range of differing circumstances that an auditor faces in today's fast changing environment.
The SEC would be well served by allowing the recent initiatives, which it supported, including the Panel on Audit Effectiveness as well as the ISB, to proceed in accordance with thoughtful due process to achieve the goals for which they were established.
International Federation of Accountants