06 September 2000
The Securities and Exchange Commission
Office of Investor Education and Assistance
450 Fifth Street, NW
Washington D.C. 20549
Submitted Via E-Mail
RE: Public Comment on Revision of the Commission's Auditor Independence Requirements (Comments are due on or before September 25, 2000). June 30, 2000 [Release Nos. 33-7870; 34-42994; 35-27193; IC-24549; IA-1884; File No. S7-13-00]
Dear Rule Making Committee Members:
In the draft of your proposed rule "Revision of the Commission's Auditor Independence Requirements (Comments are due on or before September 25, 2000). June 30, 2000 [Release Nos. 33-7870; 34-42994; 35-27193; IC-24549; IA-1884; File No. S7-13-00]," (the "Proposal") you make the following statement upon which you are seeking comment.
Specifically, the proposals provide that an accountant is not independent whenever, during the audit and professional engagement period, the accountant: (i) has a mutual or conflicting interest with the audit client, (ii) audits the accountant's own work, (iii) functions as management or an employee of the audit client, or (iv) acts as an advocate for the audit client.
In general, I believe that the Proposal serves the public good; however, I believe that it needs to be refined. Additionally, I believe that the Proposal should promote a more aggressive posture on auditor independence than it currently does.
Refinements to the Proposal
While I cannot envision a circumstance in which an auditor should be allowed to have: a mutual or conflicting interest with the audit client; audit his/her own work; or function as management or an employee of the audit client, I believe that, in certain circumstances, the public good will be served by allowing the auditor to act as an advocate for the audit client.
Traditionally, CPAs have performed audit and taxation work for audit clients. In certain circumstances, the performance of taxation work for a client results in the CPA becoming an advocate for the client. CPAs acting on behalf of their clients frequently appear before the IRS, Tax Court or other judicial bodies to plead their client's case as it relates to tax law and the position that the client has chosen to take regarding the tax law.
One of the reasons that audit and tax work have traditionally gone hand-in-hand is that they are dependent, in a large part, on a mutual body of evidence and work. Therefore, allowing the auditor to perform the taxation work results in efficiencies in performing the client's work allowing the auditor to charge less for both the audit and taxation work than would be the case if the client was forced to use different firms for its audit and taxation work.
Because taxation work frequently involves an advocacy posture on the part of the CPA, and the overall burden on the client is reduced by using the same firm to perform both the audit and taxation work, I believe that it is in the public interest to allow the auditor to function as an advocate for a client in the taxation arena. I believe that this is in the public interest because to force companies to use one CPA firm as the auditor and another as the tax preparer and advocate would increase the cost of organizational infrastructure and create a negative impact on the economy.
Change the Aggressiveness of the Proposal
The Proposal represents a good start toward ensuring auditor independence; however, it does not go far enough toward achieving that end. In my professional career, as an external auditor, an internal auditor and controller, I have seen many of the situations that are listed in the Proposal and do not believe that the Proposal will adequately address these issues. Partners in CPA firms that are performing audit work for a client are constantly aware of the need to market to the client. This effort often includes marketing by means of negotiating the meaning of GAAP with the client. This is clearly unacceptable, but, I believe, is a common practice.
I would enhance the Proposal by establishing a statutory relationship between the auditor and his client. This relationship would be structured to cover a period of five (5) years during which the auditor and client could not sever the relationship unless the auditor was grossly negligent or the client committed fraudulent acts that would require the auditor to withdraw from the engagement. After the five (5) year period, the auditor would be statutorily ineligible to act as the auditor of record for the client for a period of (5) years.
In the establishment of the relationship between the auditor and client, certain precautions will be required. While there will be a need for fee adjustments due to changes in the scope of the audit, the fee should be based on a predetermined formula that covers the entire period of the engagement. This will prevent auditors low-balling to get the engagement then, once the client has contracted for the relationship, increasing the fee.
Establishment of this statutory relationship will, in my opinion, greatly aid in the effectiveness of audit procedures and reduce the likelihood that disclosure of issues uncovered during the audit will be negotiated away in the name of client relations. In short, this will provide the "independent" auditor with much needed independence.
While the "Big 5" and the CPA profession in general, have publicly stated that they are basically against the Proposal, I believe that it is a positive step for the confidence of the investing public and the public at large. As stated above, I believe that the auditor should be allowed to be an advocate for the client in the limited framework of taxation work and relations with the IRS, Tax Court and other judicial bodies. Additionally, I believe that the independent auditor of publicly traded companies should have a statutory engagement period.
Kevin S. Holder
Kevin S. Holder
Certified Public Accountant