September 18, 2000
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0609
Reference File Number: S7-13-00
Dear Mr. Katz,
In evaluating the proposed rulings approved by the United States Securities and Exchange Commission (the "SEC") on June 27, 2000, I have concluded it boils down to one issue - Independence. As a Certified Public Accountant who has served both in the public and industry arenas, I agree that independence is the foremost building block of the accounting profession. I also agree that independence should be upheld in fact and appearance by all CPAs in public practice to ensure the integrity and objectivity of the profession are held in tact. However, I do not agree with the substance or the intent of the proposed legislation and consider there to be significant flaws in the mindset of the SEC regarding the issues at hand.
The SEC is attempting to strong-arm the accounting profession by attaching two very complex issues in the same piece of legislation: non-audit services and auditors' financial interests in their clients. In addition, in each of the last 10 annual reports to Congress, the SEC has not mentioned any concerns about the scope of service issue which would lead one to believe that the SEC has waited until the eleventh hour of the Clinton Administration to push through such a radical rule to restructure the accounting profession without Congressional oversight and public participation. The SEC has also limited the response period to 75 days - this is ludicrous considering the far-reaching and sweeping changes of the complex proposal.
I really have two questions for the SEC:
1) Has a problem been identified regarding the performance of non-audit services?
2) What authority allows the SEC to mandate such changes regarding non-audit services?
Regarding the first question, the Panel on Audit Effectiveness of the Public Oversight Board (a panel that was formed at the request of the SEC) has concluded that, "both the profession and the quality of audits are fundamentally sound." The panel said it could find no evidence that the provision of non-audit services has hurt audit quality. On the contrary, it concluded that in numerous instances non-audit services contributed to a more effective audit. In fact, even the SEC admits that there is no empirical evidence that non-audit services have compromised audit quality or auditor independence, nor ever caused an audit failure. None of the studies or reports cited by the SEC concluded that the scope of services impaired audit effectiveness, or that an exclusionary ban was necessary or appropriate. Again, my question is where is the problem?
Regarding the second question, the proposed rule, in my opinion, is based primarily, if not entirely, on alleged concerns relating to the "appearance of independence" - but not independence in fact. The statutory provisions cited by the SEC in the proposed rule pertain to public companies' filing of financial statements that have been audited by independent accountants and do not expressly authorize the SEC to make rules governing or regulating directly the accounting profession itself. The SEC does not have statutory authority to impose restrictions because of possible perceptions about independence.
As a CPA working in a family owned business, I have two concerns regarding this proposed rule. First, I feel the proposed rule would set a precedent for other regulators and would be viewed as the new model by state boards of accountancy, as well as federal (e.g., banking and ERISA) and other regulators. Ultimately, all businesses, regardless of size, will be subject to the sweeping changes. Second, as a result of the precedent, my freedom of choice when seeking outside professional services would be restricted. The SEC should not have the ability or authority to control the market place for the selection of service providers.
In conclusion, the SEC's proposal to restrict the services offered by accounting firms represents a fundamental restructuring of a profession that has successfully given investors reliable, independent data they need for the past century. This scope of services rule must not be allowed to go forward!
Marcus Y. Holland, CPA
Senior Vice President/Finance