Altschuler, Melvoin and Glasser LLP
Certified Public Accountants and Consultants
30 South Wacker Drive, Suite 2600
Chicago, Illinois 60606-7494
312.207.2800 Fax 312.207.2954 http://www.amgnet.com
September 21, 2000
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Subject: File No.: S7-13-00
Dear Mr. Katz,
Altschuler Melvoin & Glasser, LLP is a public accounting firm licensed in the state of Illinois, with offices in the Chicago metropolitan area. Until January 1999, AM&G provided audit and tax services, and a variety of consulting services, including business advisory, litigation support, healthcare consulting, technology consulting, and human resources. In January 1999, AM&G sold its tax and consulting businesses to American Express Tax & Business Services. While AM&G has several publicly held audit clients and over 50 registered broker/dealers and futures commissions merchants, the majority of our clients are closely held middle market businesses. AM&G is a member of the AICPA SEC Practice Section. Its partners have been active participants in many AICPA and Illinois CPA Society boards and committees.
Need for a Conceptual Framework for Independence
We were encouraged by the announcement three years ago that the ISB was undertaking an initiative to develop a new conceptual framework for independence. Such an initiative is long overdue. We are often frustrated with the current rules-based approach. Applying or analogizing fact situations to these rules without the benefits of a conceptual framework and explanations of their underlying rationale is daunting. In fact, it hinders use of sound professional judgment and invites circumvention. We believe independence compliance would be enhanced and decision-making would improve by first developing a comprehensive conceptual framework, specific rules that fit within that framework, and an underlying explanation or rationale for each rule. We urge the Commission to allow the ISB to continue its work on the conceptual framework before undertaking such a massive revision of the existing rules.
Effect of Proposed Rule on Middle Market CPA Firms and Middle Market Companies
We believe this proposed rule would have a detrimental effect on the ability of middle market firms to attract and retain qualified audit professionals. Also, because middle market businesses have few resources for consulting services, they often turn to their CPA firms who can leverage their knowledge of the client's business and operations and provide such services cost-efficiently.
Attracting and retaining qualified professionals is a daunting challenge for all firms. It is especially difficult in markets like Chicago where we compete with the Big 5 and three national firms. Because our structure, like that of many middle market firms, is not organized along formal functional lines, our audit professionals often participate with American Express Tax & Business Services in the delivery of tax and many consulting services. This structure enhances our ability to attract and retain qualified audit professionals because they have the opportunity on a daily basis to expand their auditing knowledge and skills into other service areas. Certainly one could argue that auditors with experience in tax, business advisory, and technology services are better financial statement auditors. For these reasons, we believe the Commission's proposal to severely limit nonaudit services would lessen the quality of our audits and hinder our ability to attract and retain qualified audit professionals.
Further, because our audit professionals also participate in nonaudit services, we cannot readily segregate audit from nonaudit professionals. The proposed rule would require that we completely restructure our organization and the job duties and responsibilities of our professionals. If firms must choose between audit and nonaudit services, we fear that only the Big 5 would be equipped to perform audits in the long-term.
We also believe the proposed rule would negatively impact our middle market clients? ability to find providers of nonaudit services at a reasonable cost. There are few consultants available for the types of services needed by middle market companies. We are able to meet these clients' needs at a reasonable cost because we can leverage our knowledge of their businesses and operations.
Affiliates of the CPA Firm
As we understand the proposed rule's application to our practice structure, independence rules would be attributed to, among others, The American Express Company and its subsidiaries and investees, and virtually any activity between these entities and an AM&G audit client would impair AM&G's independence. As a result, if a client were to obtain a $1 loan from an American Express entity, AM&G's independence would be impaired. We find it completely inconceivable that management of an American Express entity would be motivated to interfere
with or influence AM&G's audit over a $1 - or any immaterial - transaction. It is equally inconceivable that an informed investor would believe AM&G's independence to be compromised in this situation.
We urge the Commission to consider the approach taken by the AICPA's Professional Ethics Executive Committee in Independence Interpretation 101-14, which recognizes the concepts of opportunity and motivation of persons outside the firm to influence the audit. In fact, these concepts seem to be consistent with the proposed rule on financial investment, which recognizes the materiality of the investment to the individual (motivation), and his or her proximity to the persons serving the audit client (opportunity). A number of other factors might be considered in establishing guidelines for transactions and relationships between affiliates of the CPA firm and its attest clients, such as physical distance or separation, compensation and profit-sharing structures, and organizational structure and chain of command.
We appreciate the opportunity to offer our comments, and we urge the Commission to consider our primary concerns with this proposed rule: (1) the potentially devastating impact on middle market firms' ability to attract and retain qualified audit professionals, and thus their ultimate viability; (2) the effect on middle market companies' ability to obtain high-quality consulting services at a reasonable price; (3) the unreasonable restrictions on activities between affiliates of the firm and attest clients; and (4) the issuance of more "bright-line" rules without the support and context of a new conceptual framework.