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SECURITIES AND EXCHANGE COMMISSION
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Re: Comment File No. S7-13-00-SEC
Proposal re: Auditor Independence
Dear Mr. Katz:
This comment concerning the SEC's proposed rule on auditor independence is submitted on behalf of Milberg Weiss Bershad Hynes & Lerach LLP. Our firm specializes in representing defrauded investors and has been involved in most of the major securities fraud litigations in the United States in the past 25 years. Unfortunately, our experience indicates that the worst frauds we encounter are financial frauds and that almost always, auditor defalcation is implicated.
When the securities laws were initially enacted in the wake of the Great 1929 Crash and resulting economic collapse, consideration was given to nationalizing the major accounting firms and having public company auditing performed by employees of the Federal Trade Commission. This approach was rejected after the accounting profession promised that they would submit to SEC oversight, maintain independence from their clients and perform a public watchdog function. Unfortunately, as years have passed and the accounting profession has evolved into a powerful worldwide oligopoly, these promises have been forgotten. The recent scandal regarding PriceWaterhouseCoopers' violation of independence standards is only one shocking example.
It has been asserted there is as yet no "empirical evidence" demonstrating a loss of auditor independence in providing consultant and other non-audit services. In fact, we know otherwise.
In prosecuting securities fraud cases against public companies and their auditors, we obtain access to internal corporate documents that are sealed from public view by confidentiality orders and are never made available to the Commission. Over the years, we have seen repeated instances where auditors are unable to maintain independence from their clients. Not infrequently, the lack of independence arises most directly from the fact that the auditing firm has substantial consulting relationships with the client - relationships that are extremely lucrative - much more lucrative than the auditing work. In some instances, public companies bid out auditing work demanding low bids, while indicating to the bidding firms that low auditing bids will be rewarded with lucrative consulting work. And, as auditor consulting work for public companies has evolved into the creation, customization and implementation of sophisticated computerized inventory control and financial forecasting systems, auditors all too frequently end up auditing their own work. Effective internal controls are an essential prerequisite for an effective audit. Frequently, these computerized internal control systems are defective, impaired or do not work adequately. Auditors who confront these inadequacies are unable to independently evaluate them since the consulting arms of the auditing firm helped put those systems in place.
The concept of auditor independence has been a bedrock of public company accounting in this country since the enactment of the securities laws. If that concept is worthwhile and is to be maintained, then the auditing and consulting functions must be separated. Anything less will result in continual compromising of auditor independence to the point where the concept of independence will no longer be viable.
For all the reasons stated in this letter, we strongly support the SEC's proposed rule on auditor independence in the belief that it will lead to higher quality of financial reporting in this country and better protection of the investing public.
Respectfully submitted,
WILLIAM S. LERACH
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