September 22, 2000
Mr. Jonathan G. Katz
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Dear Mr. Katz:
I am a partner with Honkamp Krueger & Co., P.C. in Dubuque, Iowa. I am writing in response to the recent SEC proposal to limit the scope of CPA services. Although our firm does not perform any audits for SEC companies, this proposal is cause for serious concern because of its dramatic negative impact on the accounting profession and my firm.
We are a regional CPA firm located in Eastern Iowa who provide services to well over 5,000 clients. These services include audit, tax, information technology consulting, human resource consulting, bookkeeping and various other services. This proposal, if enacted, would have a significant negative financial impact on our firm. We provide several types of service to our audit clients and we provide these services at their request. I do not believe the performance of these services causes any impairment in audit effectiveness. In fact, I believe these services assist the auditors and produce a better audit product. I also believe that the SEC has based its decision to move forward with this rule prohibiting non-audit services without facts or evidence. 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. The SEC's proposed rule is a solution in search of a problem.
In addition, the SEC 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 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. I agree with the Panel's conclusions and have seen this happen in actual audit engagements.
Our firm audits financial institutions and provides both business and personal tax services to our audit clients. This rule is dangerous for the accounting profession because the rule will set a precedent for other regulators (OCC, FDIC, ERISA, etc.). The proposed SEC rule would be viewed as the new model by state boards of accountancy and regulators. Therefore, accounting firms that do not audit SEC registrants will be impacted by these new rules. In addition, 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 CPA's from representing clients before the IRS. It would be very difficult to explain to a client for whom we've provided tax advice that we cannot provide IRS representation for them.
This proposal is hasty legislation. In its rush to regulate, the SEC
It makes sense to me that we wait and see how the new reforms work before we adopt legislation that dramatically alters the operating practice of virtually all CPA firms.
This proposed rule also severely hampers a CPA firm's growth into other business or service areas.
Accounting firms effectively would 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 of 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 financial consequences of this proposal are far reaching. It is realistic, based on this proposal, that our firm would have to eliminate services that provide over $1 million in revenue. Our audit practice could possibly be eliminated, as well as consulting areas such as human resources. Our firm would have to look seriously at providing only non-attest services.
Recent regulatory changes now allow CPA firms to perform services in the financial services industry. We would have to examine how this ruling would impact our affiliations in this area. Again, we would have to strongly consider the impact of this ruling on our attest and non-attest services.
The SEC proposal is also bad news for CPA's 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 rules, a public company might be compelled to dismiss an audit firm that has done consistently outstanding work in order to obtain services from the auditor's non-audit colleagues.
If the rule is adopted there will be a negative effect on recruiting and retention of the best talent. The best audit professionals will not want to be at a firm where 25% - 40% of the market is "off-limits", and the same is true for the best non-audit professionals. Similarly, the best and brightest students will not be drawn to firms with a limit on upward opportunities. The "audit-only" firms endorsed by the proposal will have difficulty attracting the necessary talent both from accounting programs and from information technology programs, because the best talent will be drawn toward industries with broader career opportunities.
It is extremely difficult to attract talented professionals to Dubuque, Iowa. If this rule is adopted, recruiting will become virtually impossible. It is my opinion that this will eventually cause a degradation in audit quality because less-qualified personnel will eventually be performing the audits.
Broad restrictions on non-audit services will likely have the perverse effect of undermining auditor independence by making audit firms overly or exclusively dependent on auditing fees, which would certainly be contrary to the public interest.
I believe the SEC has needlessly tied its popular and long-overdue modernization of family disqualification rules - depression-era rules that discriminate against working women and two-career families - to its far more controversial scope of services initiative. Modernization of the financial-interest standards can and should occur on an expedited basis, independent of the scope of services initiative. The scope of services initiative requires more time for fact-finding and analysis than provided by the SEC's timeframe.
In addition, the SEC lacks authority to 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.
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 they need for the past century. A decision by a government agent to tell some business organizations what services they may offer and to tell other businesses from whom they can buy services is an extraordinary economic intervention without any 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 go forward.
HONKAMP KRUEGER & CO., P.C.
Arnold N. Honkamp, Managing Partner
Richard R. Runde, Partner
Dale J. Leibfried, Partner
Alan W. Krueger, Partner
Gregory C. Burbach, Partner
Kevin R. Schmitt, Partner
Natalie H. Hoffmann, Partner
Ronald F. Helle, Partner
Robert R. McQuillen, Partner
Terry J. Maiers, Partner
Douglas R. Rogers, Partner