Tel (425) 644-4800
Fax (425) 562-8853
902 140th Ave NE
September 18, 2000
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Reference: File #S7-13-00
The Washington Society of CPAs (WSCPA) consists of 9,000 members who represent all facets of the types of work that CPAs perform, including members in public accounting firms (national, regional and local), members in industry (including CFOs, controllers, internal auditors, financial personnel and entrepreneurs), members in government and members in education. As those who work directly with businesses and organizations of all sizes and types, we are strongly opposed to the SEC's proposed rules with respect to Auditor Independence, and urge you to direct Chairman Arthur Levitt to withdraw this proposed rule.
We echo previous letters that you have received, which criticize the proposal based upon the lack of process, and the SEC's ignorance of the conclusions of the Panel on Audit Effectiveness of the Public Oversight Board. We also agree that there is no empirical evidence which would indicate that the provision of non-audit services has compromised audit quality or contributed to audit failures.
Our emphatic request is that you seriously consider the negative impact which this proposal would have, if implemented, upon businesses of all sizes and types, and for the investors therein. The ramifications of this proposal would be the necessary segregation between those CPAs who provide audit services, and CPAs who provide other accounting and consultive services. Clients would have to choose one firm to perform its audit, and another firm for other needed services. This would be harmful for businesses and their investors:
- By limiting the scope of the auditor's ongoing knowledge of a company's operations, the auditor is actually more likely to miss incidences of fraud or reportable conditions, thereby diminishing audit quality and increasing the likelihood of audit failure.
- Businesses will have to contract with multiple CPA firms, one for its audit, and another for consultive services. This will cause additional costs for businesses, not to mention confusion and frustration in determining what services or advice they are allowed to obtain from their auditors, and what they are not allowed to ask for.
- CPA firm personnel will be required to limit the nature of the work that they perform for an audit client, which will narrow the development of non-audit-specific competencies for the CPA. One might believe that this would actually enhance the development of auditing skills, but actually, the exact opposite is true. To develop audit skills, including probative skills, logical tracking, technological understanding, and requisite skepticism - each requires a broad base of competencies and experience therein. This will not be gained by narrowing the type of work to be performed by auditors.
- This proposal would severely reduce the number of the best and brightest students selecting auditing careers. Students will clearly see this proposal as narrowing their career opportunities if they choose an audit position upon graduation. The natural result will be a decline in qualified audit staff, and in eventual promotions into position of audit management. This can only provide harm, not benefit, to audit quality and effectiveness.
Although the proposal, as drafted, would only apply to SEC registrants, this proposal is bad for small business:
- The CFOs, controllers, financial personnel and internal auditors of small businesses, as well as the staff accountants of small CPA firms, frequently begin their careers in CPA firms which perform audits of SEC registrants. The natural result of this proposal would be a reduction of CPAs with that experience, which then limits the supply (in the private sector) of financial personnel with an audit background.
- Although this proposal indicates that it would only apply to SEC registrants, the principles would inevitably spill over into other regulatory processes which impact small business. For instance, we are concerned about how this could impact the DOL's rules for ERISA audits. The proposed rules could well be viewed as the new model by state boards of accountancy, again having a direct negative impact on audits of small business, for the same reasons as indicated on the previous page.
- Small businesses particularly rely on their CPA firm as their trusted business advisor. For the small business which intends to go public, it would be forced to sever the audit portion of its relationship with their CPA firm for some period well in advance of the IPO, so that their pre-IPO audits will qualify as meeting standards of audit independence. Not only will this increase costs for these small businesses, it will compromise the audit quality of these audits for the same reasons stated earlier.
- As noted earlier, we fear that these principles, if enacted, would spill over into other regulatory forms, such as state boards of accountancy. This would require all small businesses, not just those planning to go public, to have two CPA firms, one for its audit, and one for other accounting and consultive services. It is highly likely that the CPA firm for the small business is another small business - a local CPA firm. This will mean a loss of business for the small CPA firm, which then hampers its ability to succeed. (Do not underestimate the number of small businesses which have annual audits of its financial statements! Some do so because of banking or bonding requirements, and many also engage for an annual audit as an important management tool).
- Although Chairman Levitt's communication to NASBA would indicate that small CPA firms should support the SEC's proposal, our input from small firms is exactly the opposite. In fact, the ability to work as a trusted business advisor enhances the small firm's ability to know the client's operations and makes the small firm a more informed skeptic as its auditor. To deprive the small firm of that ability will actually cause far more harm to the public than good.
As the representatives of the CPA profession, we are concerned and frustrated when audit failures do occur. We would love to see a world where there were no incidences of audit failure whatsoever, but we cannot possibly endorse the SEC's proposal as the way to make that happen. Indeed this proposal would actually place us further from that goal. This proposal would have a negative impact on audit quality, which is contrary to what both the SEC and the WSCPA would seek to achieve.
Thank you for your consideration of this input.
Bea L. Nahon, CPA, President