Heller Financial, Inc.
500 West Monroe Street
Chicago, Illinois 60661
Barbara E. LaSusa
Associate General Counsel
September 25, 2000
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Proposed Rules on Auditor Independence
File No. S7-13-00
Dear Mr. Katz:
On behalf of Heller Financial, Inc. ("Heller"), we welcome this opportunity to comment on the proposed Revision of the Commission's Auditor Independence Requirements. Heller is opposed to the proposed rule to the extent that it seeks to prevent audit firms from providing non-audit services to their audit clients.
By way of background, Heller is a worldwide commercial finance company providing a broad range of financing solutions to middle-market and small business clients. With nearly $19 billion in total assets, Heller offers equipment financing and leasing, sales finance programs, collateral-and cash flow-based financing, financing for healthcare companies and financing for commercial real estate. The company also offers trade finance, factoring, asset-based lending, leasing and vendor finance products and programs to clients in Europe, Asia and Latin America. Heller's common stock is listed as "HF" on the New York and Chicago Stock Exchanges. Heller can be found on the World Wide Web at www.hellerfinancial.com.
The US securities laws are premised upon ensuring full and fair disclosure in order to allow investors to make fully informed investment decisions. We believe expanding disclosure requirements regarding relationships between public companies and their external auditors is preferable to the proposed rule's restrictive provisions regarding non-audit services. The proposed approach of prohibiting virtually all non-audit services is ineffective when applied in the context of global organizations subject to differing laws and ethical obligations in multiple jurisdictions around the globe. The proposal also has an undesirable extraterritorial effect at a time when the US is already under criticism for the extraterritorial reach of its accounting rules.
The primary responsibility for ensuring that financial statements accurately depict the financial condition of a company and disclose all material matters that may affect that financial condition is with the management of the company, the Board of Directors and the Audit Committee -- not with the auditors. The auditors job is to determine whether or not, in their opinion, management has done its job. The proposed rule seems to ignore the fact that significant protections already exist, combined with significant liability, to ensure that management, board members and audit committee members carry out their duties to the public of full and fair disclosure of the financial condition of the company for which they are responsible.
Heller is particularly concerned with the approach taken in the proposed rule with respect to consulting and legal services performed by audit firms to their audit clients. Global organizations are extremely complex and are becoming increasingly so in the new economy. The SEC rule takes a one size fits all approach which will be completely ineffective when applied against the diversity of business models utilized by US publicly traded companies. The proposal also departs significantly from the general premise of our securities laws which demand full and fair disclosure as opposed to a prescription as to how management and Board members should or should not manage. The proposal also seems to ignore the fact that there is a substantial amount of self regulation already occurring in this area. This self regulation is obviously effective since there is virtually no evidence to show that consulting or legal services provided by auditing firms to their attest clients has affected the independence of the auditors.
In terms of self regulation, Heller is concerned that this proposal would undermine the efforts of the Independence Standards Board ("ISB"). Heller understands that the SEC concurred with the establishment of the ISB as an organization that would provide leadership not only in improving current auditor independence requirements, but also in establishing and maintaining a body of independence standards applicable to the auditors of US public companies. The ISB has undertaken to do so through a series of actions including the development of a conceptual framework for independence applicable to audits of public entities which will serve as the foundation for the development of principles-based independence standards. We think the ISB's approach is preferable to the proscriptive approach proposed by the SEC.
Companies are requiring all their service providers to become more multidisciplinary largely due to the increasing complexity of the current business environment. It is insufficient for an outside service provider to remain in a silo and provide only technical expertise. The service provider, by staying in a technical silo, will provide inadequate client service in today's business environment. Instead, companies are demanding their service providers take on more of a problem solving approach as opposed to just being a technical expert. Companies are demanding that their service providers focus on what the client is trying to accomplish and understand that their technical expertise is merely the framework within which the service provider can craft solutions to meet the client's needs. Technical expertise alone provides little value to clients today. This is true in the audit world as well. Requiring an auditor to limit its interaction with its audit clients to the audit function alone, would place the auditor in an artificial silo which will make the auditor less effective. This siloed approach would make it increasingly more difficult for the audit firms to attract and retain the top talent needed to effectively audit the complex global organizations that make up the roster of US publicly traded companies.
Heller would like to specifically comment upon the provision of legal services by audit firms to their audit clients and the impact the proposed rule might have. The arguments that have been made both pro and con regarding the provision of legal services by lawyers affiliated with audit firms responsible for auditing the firm ignore an important component in the equation. Publicly traded companies are run by sophisticated management teams and are overseen by sophisticated Boards of Directors and independent Audit Committees. These individuals do not blindly follow advice provided to them by external service providers such as lawyers. They consider that advice in the context it was rendered and exercise their business judgment to make decisions. Senior management, Boards of Directors and Audit Committees of public companies have a duty to act solely in the best interest of the company and to maximize shareholder value. The people making decisions regarding how the publicly traded company is operated, what is contained within the financial statements and what controls and processes are in place within the company are the management of the company. The management of the company may rely on advice from various advisers, including legal counsel, in reaching those decisions. But ultimately, the auditors are auditing the results of those management decisions and making judgments about those decisions in the context of ensuring the financial statements of the company accurately depict the company's financial condition. The obligations of management, the Board of Directors, the Auditors and Legal Counsel are aligned. Existing laws already provide serious consequences to each of those constituencies if they fail to honor their obligations. Additionally, it is difficult to envision how public disclosure improves by requiring companies to be represented by counsel unaffiliated with their auditors.
When a lawyer represents a publicly traded company, the lawyer's client is the organization itself, not the employees or managers of that organization. Necessarily, the organization can only act through its employees, managers and officers. However, under the ethical rules governing legal representation of organizations, an attorney is obligated to act in the best interest of its client, the organization, even if that is not in the best interest of an individual employee, manager or officer of that organization. More often than not, the obligations of lawyers, management and auditors are aligned. The existing rules requiring audit committee oversight over both non-audit and audit services provided by the audit firms or their affiliates should be given time to work. In our experience, these rules encouraging self regulation have been very effective. As an example, certain services such as representation in litigation matters or material transactions have been voluntarily agreed by audit clients and audit firms to be outside the scope of permissible services due to the potential for conflict in those areas.
The proposal significantly limits the ability of management to select the best service provider. As an example, the field of players able to provide legal services on a global scale and in a coordinated and efficient manner is extremely limited. Despite all the consolidation in the legal services market and the recent global affiliations, in our experience very few firms understand client services in the way that Andersen Legal does. Heller would retain a firm like Andersen Legal, not because it is affiliated with Arthur Andersen, but because it views Andersen Legal to be the service provider best able to meet the company's legal needs. Since Andersen Legal is presently restricted from practicing law in the US, legal services provided by Andersen Legal would be provided entirely outside the US. However, the SEC's proposed rule would dictate that Heller, due to its affiliation with Arthur Andersen as auditor, could not retain Andersen Legal on legal matters outside the US. In Heller's view, this will force Heller to accept second-rate service, incur additional costs to manage multiple providers to gain the same level of service, and in the end will provide no benefit to the investing public in the way of better disclosure. Nor can we fathom the proposition that Arthur Andersen would ever consciously overlook an accounting issue on the audit of Heller's books and records because of the fear of losing the legal work Heller gives to Andersen Legal, which is in the greater scheme of things insignificant in dollar terms to each of Arthur Andersen, Andersen Legal and Heller.
We are concerned that the position the ABA has maintained and recently publicized will impact this rule and we would encourage caution when evaluating the ABA's views in light of the current SEC proposal. We believe concerns expressed by the ABA are manufactured by those taking a futile protectionist view as opposed to because any real risks are created by multidisciplinary practices. Multidisciplinary practices are emerging due to client demand and the lawyers fighting against this would do well to ask their clients their views on the subject before they take a stand against such an approach. Sophisticated clients are demanding that lawyers adopt more of a client services approach, and law firms will need to adapt or risk becoming dinosaurs.
In summary, we believe the existing system of checks and balances currently in existence under the securities laws and the various applicable codes of ethics, combined with the litigious society in which we live, are sufficient to provide the right mix of carrots and sticks to encourage appropriate behavior. If action must be taken, we would be in support of rules strengthening disclosure requirements surrounding relationships companies have with their audit firms outside of the traditional audit relationship. Heller is completely supportive of full and fair disclosure. However, any rule which seeks to prevent non-audit services will, in our view, have more downsides than upsides for the investing public and, therefore, we would be opposed to such a rule.
HELLER FINANCIAL, INC.
Barbara E. LaSusa
Associate General Counsel