Date: 09/21/2000 2:12 PM Subject: Jonathan G. Katz, Secretary - S7-13-00 Proposed Reg - Audito September 19, 2000 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street, N. W. Washington, D. C. 20549-0609 Re: Proposed SEC regulation redefining auditors independence - Ref. No S7-13-00 Dear Mr. Katz: I am totally opposed to the sections of this proposed regulation prohibiting auditors from performing numerous other services for our clients. Having practiced in accounting for over thirty years, I believe the sections of this SEC proposal will have a tremendous negative impact on the future of my profession for the following reasons: 1. Little if any evidence of problem: There is the old adage "If it ain't broke, don't fix it." From what I have read the Panel on Audit Effectiveness of the Public Oversight Board (which your agency appointed) concluded "both the profession and the quality of audits are fundamentally sound." It is also my understanding that the Board found no evidence the provision of additional non-audit services has negatively in any way harmed the quality of my professions audits under the current regulations. In fact, they found just the opposite. The Board's findings included many instances where performing other services actually contributed to the effectiveness of the audit. 2. Severely overstepping its' authority: I am totally opposed to any government agency deciding it has the authority to tell a certain industries organizations what services they can offer, and then tell those who depend on these services who they can contract with for these services. 3. Next step become mandated for all non-SEC companies: If adopted by the SEC, probably most other industries would jump on the band wagon feeling in must be critical and therefore adopted by their industry. If adopted by such agencies as the DOL, financial institution regulators, etc. it would have a tremendous negative financial impact on many smaller businesses or organizations covered by these agencies. 4. Confusing to public if not uniformly adopted: Auditor independence has long been critical in the public's perception. If different regulators require different independence criteria, it will undermine public confidence. Currently, independence standards are basically the same. One regulator going off and adopting its own guidelines, may soon be followed by another agency establishing their own criteria, followed by another regulator with different guidelines. These actions would do nothing but undermine public's understanding and confidence in what independence means. 5. Open Pandora's box: If the SEC can establish criteria, why not others - regulators, courts, IRS, other countries, etc.? We are moving into a global world. We don't want to open the floodgates and allow whoever to set their own independence criteria. If various groups start establishing their own, where may it end? It is certainly possible for situations to arise where no auditing firm may be independent. This could arise due to conflicting regulatory requirements in a company's diversified operations (different segments governed by conflicting regulatory body independence requirements), or conflicting countries requirements for a business with world-wide locations. 6. Damage CPA client relationships: CPA audit firms would become gun shy whenever their client asked a question. Where does the definition of consulting begin and end. What happens when an auditor is reporting on an internal control problem found in the audit and the client asks how to fix it. If the auditor's answers, isn't this consulting? Where do you draw the line? The possible conflicts are endless. Could auditor's be set up by unethical management to perform additional services in border line issues, then use these situations later as a leverage against the auditor? 7. Severe financial harm to most smaller businesses that require audits: Many businesses and organizations do not have the financial resources to afford highly trained in house accounting professionals. Currently these entities are probably not governed by the SEC. However, they could soon be due to the domino effect. The accounting personnel these companies can afford do not have the sophistication to understand highly complex FASB, SEC, AICPA, DOL, financial institution, not-for-profit, tax versus book depreciation, etc. requirements. They look to their auditor to assist in these areas. This potential snowball affect of this proposal would effectively require smaller clients to hire two CPA firms; one to help them prepare the financial statements in compliance with all of the appropriate regulations, and another firm to do the audit. Effectively this proposal would require smaller companies to pay the expense for two CPA firms to really understand their business and make sure they are in compliance with all regulations. This would be financially devastating to many of my clients in areas such as small employee benefit plans regulated by the DOL, financial institutions such as small credit union's, not-for-profit organizations required for various reasons to have audits, etc. 8. Limit competition: Many firms are merging to stay competitive. The proposal would further restrict competition. Firms would be forced to elect in many instances whether to be auditors or provide other services. Therefore the pool of CPA firms qualified as auditors would decrease significantly. 9. Limit the college graduate and CPA licensed accounting pool: A significant number of CPA firms provide audit and other services. Audit experience is required in most states to become licensed as a CPA. This allows college graduates a selection between many firms that have enough audit clients so they can become licensed as CPA's. However, this proposal would effectively decrease the number of firms where candidates can gain their experience, therefore decreasing the number of employees and firms' employment options. 10. Severely damage the CPA designation: The main perception of the public is that CPA's are qualified auditors, with many becoming very proficient in other areas such as tax, business valuations, estate planning, etc. However under this proposal, many firms will be forced to drop their audit business. Therefore increasing the public's confusion as to whether a CPA is an auditor, or just what does that designation mean. 11. Financially devastate firms: One of the reasons CPA firms have branched out into other non-traditional areas is due to regulatory interference. The government has forced many businesses to switch to calendar year ends. This severely impacted many CPA's causing them to work like slaves during tax season, and branch out into other areas just to put food on the table the rest of the year. We don't need more regulatory interference that will only further damage the effectiveness in practicing our profession. We are having enough problems right now attracting college candidates into accounting, without adopting the SEC proposed independence regulations that will only increase the shortage. Also, many firms have formed various industry and regional alliances in order to be more effective and serve their clients needs. This proposed regulations could destroy many of alliances. 12. Minimal exposure and comment period: This proposal appears to have been thrown together very rapidly, given a minimal exposure and comment period, and inappropriately coat-tailed onto other provisions the accounting profession wants for the sole purpose to increase the likelihood of passage. Whenever a regulatory agency ignores the recommendations of an independent board, it brings to question whether the proposal is really in the public's best interest or is the personal agenda of a few. Why was this Board established spending several years researching and developing recommendations based on in-depth research, and their recommendations ignored? Why was a proposal just the opposite quickly thrown together, published, and pushed to implement as fast as possible? There appears to be more behind this proposal than what appears on the surface. In conclusion I am totally opposed to the independence recommendations in this S7-13-00 proposed regulation. I hope that what appears to be the majority in my profession and the public will have your support in eliminating and defeating this portion of the proposal. Sincerely, Richard D. Layton, CPA & CFE