Via e-mail:

Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: File No. S7-13-00


On behalf of the Ethics Committee of the Illinois CPA Society (ICPAS), which represents 24,433 Illinois CPA's we wish to respond with our opposition to the proposed rule of prohibiting non-audit services for firms auditing SEC registrants. This rule would force a major restructuring of the accounting profession and would drastically alter independence requirements for accounting firms that audit SEC registrants without providing empirical data as to why this is necessary. 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. We have not seen a problem that this rule solves or protects against.

The SEC has ignored the conclusion of the current Panel on Audit Effectiveness of the Public Oversight Board, a Panel that was formed at the request of the SEC. The Panel concluded that, "both the professional 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.

We are concerned for the survival of the accounting profession that the likely prospect that the proposed rule would set a precedent for other regulators. Even accounting firms that do not perform SEC registrant audits could be impacted by these new rules. The proposed SEC rule would be viewed as a model by state boards of accountancy, as well as federal (e.g. banking, ERISA) and other regulators.

The proposed rule would cause the SEC to micromanage the business affairs of accounting firms impeding the ability of firms to adapt to market conditions. This ignores the particular expertise that firms have invested to differentiate themselves from each other. Additionally, the increased costs from this proposed rule would cause firms to be competitively disadvantaged, with the attendant loss of business to their non-accounting firm competitors. The strength of having non-audit business helps provide the necessary resources to maintain competitive salary and benefits to support both the audit and non-audit staff and required training.

We question this rule in light of the last three years work of the Independence Standards Board (ISB), which was established at the initiative of the SEC. The ISB was established to develop a new conceptual framework for auditor independence and create appropriate implementing standards.

The SEC has not allowed time for important reforms to work; including new disclosure and audit committee requirements adopted by the ISB, the NYSE, the NASD, the American Stock Exchange and the SEC. Therefore the proposed rule is premature.

The SEC claims its proposed rule "would not affect tax-related services" to audit clients. However, it would ban acting as an advocate for an audit client, or providing expert services in administrative proceedings, thus (except in preparing returns) potentially prohibiting CPAs from representing audit clients before the IRS.

The proposed rule would impute to an accounting firm the activities of virtually any entity with which the accounting firm has a commercially valuable business relationship by viewing such and entity as an "affiliate of the accounting firm." Accounting firms would effectively be precluded from entering into almost any joint venture or partnership, since the accounting firm's independence could be impaired as a result of the activities of other parties in which it may have only an immaterial investment, or with which it may be associated in only limited respects, but does not control.

Regional alliances or cooperative agreements between accounting firms could result in each firm being required to be independent or each other firm's attest clients. Moreover, the restrictions would extend to any alliance or cooperative agreement with overseas accounting and other firms (such as legal service providers).

The SEC proposed rule is bad news for CPAs working in industry, since it would restrict public companies' freedom of choice when seeking outside professional services. The SEC would force public companies to constantly choose whether to hire a firm solely as its auditor or solely as a provider of other services. In fact, under the proposed new rule, a public company might be compelled to dismiss an audit firm that has done consistently outstanding work in order to obtain services from the auditors' non-audit colleagues. This could also lead to significant cost increases for the audits.

We question whether the SEC has the authority for its sweeping scope of services rule. 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 proposed rule is based primarily, if not entirely, on alleged concerns relating to the "appearance of independence" but not independence in fact. The SEC does not have statutory authority to impose restrictions because of possible perceptions about independence.

The broad restrictions on non-audit services will likely have the reverse effect of undermining auditor independence by making audit firms overly or exclusively dependent on auditing fees, which would certainly be contrary to public interest. Such restrictions will also harm the recruitment and retention of the most qualified personnel, causing a possible degradation in audit quality.

We do concur with the proposed modernization of the family rules. The modernization of the financial-interest standards should occur as well.

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 the reliable, independent data that they need for the past century. A decision by a government agency to tell some business organizations what services they may offer and to tell other business form whom they can buy services is an extraordinary economic intervention especially without empirical or other basis. We think most Americans would find this a curious public policy position for their government to take. This scope of services rule must not be allowed to be adopted.


Sheldon P. Holzman

Sheldon P. Holzman, CPA, CFE
Chairman, ICPAS Ethics Committee
(A Senior Technical Committee of the ICPAS)



2000 - 2001

The Ethics Committee of the Illinois CPA Society (Committee) is composed of the following technically qualified, experienced members appointed from industry and public accounting. These members have Committee service ranging from newly appointed to more than 20 years. The Committee is an appointed senior technical committee of the Society and has been delegated the authority to issue written positions representing the Society on matters regarding the setting of auditing standards.

The Committee usually operates by assigning Subcommittees of its members to study and discuss fully exposure documents proposing additions to or revisions of auditing and attest standards. The Subcommittee ordinarily develops a proposed response that is considered, discussed and voted on by the full Committee. Support by the full Committee then results in the issuance of a formal response, which at times, includes a minority viewpoint.

Current members of the Committee and their business affiliations are as follows:





Callistein, Arthur M. CPA

Altschuler, Melvoin & Glasser LLP

Ebersberger, Wayne R. CPA

Ernst & Young LLP

Franklin, Richard M. CPA

Warady & Davis LLP

Koch, John A. CPA

BDO Seidman LLP

Marino, David CPA


Olson, Walter R. CPA

Friedman, Eisenstein, Raemer and Schwartz, LLP

Wodka, Alexander J. CPA

Crowe Chizek & Co. LLP

Zaidman, Gerald L. CPA

Altschuler, Melvoin & Glasser LLP



Doran, Edward J. Jr. CPA

Wermer, Rogers, Doran & Ruzon

Holzman, Sheldon P. CPA

Kupferberg, Goldberg & Neimark LLC

Horstman, Robert E. CPA

William F. Gurrie & Co.

Martin, Keith E. CPA

Gleeson, Sklar, Sawyers & Cumpata LLP

Stepusin, Paul L. CPA

Pandolfi, Topolski, Weiss & Co., Ltd.



Avramovich, Michael P. CPA

Avramovich & Associates, P.C.


Katch, Ronald S. CPA

Katch, Tyson and Company


Nykiel, Kenneth J. CPA

Nykiel, Carlin & Co. Ltd.




Brauweiler, Carl F. CPA


Wolter, Fred H. CPA

CCS Financial Services, Inc