Computer Sciences Corporation
2100 East Grand Avenue
El Segundo, California 90245
By Electronic Mail
September 6, 2000
Mr. Jonathan G. Katz
Secretary, Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Reference File Number S7-13-00, Proposed Rule: Auditor Independence Requirements
Dear Mr. Katz:
Thank you for allowing public comment on the Securities and Exchange Commission's ("SEC") release of the proposed rule regarding auditor independence. Computer Sciences Corporation ("CSC") supports the SEC's goal of modernizing the requirements governing auditor independence. We believe such modernization should include a more narrow definition of allowed services beyond tax and auditing for public accounting firms and appropriate guidance to prevent future potential conflicts.
There are numerous issues addressed by the proposed rule. However, our comments focus only on those that directly affect our business, the Information Technology ("IT") marketplace, defined for this purpose to include hardware, software, and services. This market currently represents nearly 14% of the U.S. Gross Domestic Product, up from approximately 11% in 1997. Based on our knowledge of real and potential conflicts, in addition to those activities excluded by the proposed rule, we strongly urge the following services listed in Appendix A should be prohibited: Information Systems Technology, Business Reengineering, Outsourcing, and Marketing & Distribution. Detailed below are several reasons why we think public accounting firms should not offer these services. Alternatively, if the SEC believes that the firewalls between the various service lines within accounting firms are sufficient to prevent conflicts and maintain independence, then the prohibition of not being able to team with or create a primary or subcontract relationship between an auditor and client is logically inconsistent and should be removed.
As noted by the SEC, the "Big 5" public accounting firms audit approximately 77% of public registrants and generate consulting revenue from approximately 80% of those clients. We expect that the "Big 5" audit nearly 100% of the Fortune 500 companies. In addition, according to the SEC, "Big 5" revenues from Management Consulting Services ("MCS") and other non-audit/tax services have increased from approximately 15% for 1981 to approximately 50% for 1999, and auditing revenue is now about 30% of the firms' total revenue. It is our opinion that this evolution of service mix within the accounting industry creates inherent conflicts, and it is improbable that the so-called firewalls put up within these firms can ensure auditor independence.
We are concerned with the intricate, complicated web of relationships that arise as public accounting firms diversify and expand their offered services. For example, whether intended or not, offering IT services directly or indirectly generates conflicts with clients. Within the IT marketplace, companies regularly compete for some engagements and team or form alliances to pursue others, all at the same time. However, other than CPA firms, none of the companies selling services or products in this market deliver attest services mandated by the SEC, nor do they have access to the most confidential records of competitors. In such circumstances, how can accounting firms address this reality without generating independence conflicts? Are major accounting firms willing and able to limit their target market to a universe that excludes existing or potential audit clients and the extensive list of others with whom they must effectively have alliances to compete in the IT market? Hardly, because their market potential would rapidly approach zero.
As the number of public accounting firms decreases and their size increases, the inter-relationships between their consulting practices, audit clients and those clients' competitors and customers become very extensive and complex. Given their size, these accounting firms cannot avoid either competing with audit clients within the IT space or delivering services designed to facilitate other companies competing with their audit clients. In addition, today's market reality is such that the "Big 5" IT service practices maintain alliances with many companies and have become distributors and wholesalers of products of clients or their clients' competitors. Although direct prime/subcontractor relationships with audit clients are prohibited, the complex nature of the simultaneous competition and alliances within the IT marketplace presents fertile opportunities for auditor conflict with potential or perceived effects on independence.
Auditors of companies that operate in the IT arena gain valuable knowledge about their clients as they have unrestricted access to sensitive information such as business plans, detailed business results and pricing models in order to complete their required function. Accordingly, there is substantial risk of transferring intellectual capital from a client to the consulting practice of the accounting firm and others. Any leak of this type of valuable information, or even directional indicators, across the firewalls is harmful to the audit client's interest and the industry as a whole.
The attest function is a key element of thriving and efficient capital markets. Independence is crucial to the integrity of the attest function. Auditors conducted quality audits long before they ever offered consulting services. In our opinion, no firewall is solid enough to prevent the inherent conflicts between the IT marketplace and the audit function. We strongly urge the SEC to narrow the definition of permitted services provided by public accounting firms in order to maintain auditor independence, in both fact and appearance.
Thank you for the opportunity to comment on this issue.
Leon J. Level
Vice President, Chief Financial Officer and Director