August 15, 2000
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
RE: Response to Commission's Proposed Recommendation on Auditor's Independence
Dear Secretary Katz:
Please accept this letter as our Firm's response to the Commission's most recent proposed regulations on Auditor's Independence.
Santos, Postal & Company, P.C. is a local Rockville, MD public accounting firm. We provide auditing, accounting and tax services to over 250 small and medium size businesses. Approximately 10% of our annual fees are derived from auditing services. While none of our clients are publicly held, we will be affected by the SEC's proposed regulations in several ways. First, SEC accounting rules and regulations have historically been used by other government agencies and regulatory bodies as models for their rules and regulations. We do have clients that are subject to HUD, HEW and DOL regulations. Second, we have as audit clients, small brokers-dealers, which while privately owned, are still subject to SEC financial reporting regulations. Finally, the proposed regulations will most likely affect the accounting labor pool, which will directly affect our business.
As auditors and accountants, we are well aware of the importance of maintaining our independence, both in appearance and in fact, while performing attest engagements. It is important to note that the SEC's proposed regulations were drafted to address issues of independence in appearance, not fact. The SEC admits that there is no empirical evidence that non-audit services have compromised audit quality or auditor independence, nor ever caused an audit failure. However, while attempting to address this issue, the SEC disregarded the most important issue. Auditor independence is inherently affected by the fact that the client pays the auditor to perform the audit. No other issue of fact or appearance is more significant than this. Fortunately, it has been long accepted that any alternatives to this practice would lead to an unacceptable degradation in the quality of audits. We believe that the SEC proposed regulations prescribe an alternative that would lead to an unacceptable degradation in the quality of audits for small and medium size businesses for the following reasons:
1. Small accounting firms would not be economically viable. Surviving firms would either be absorbed by larger firms who would be too large and expensive to service small and medium size businesses, or be subjected to cost containment measures that would threaten audit quality. Small accounting firms such as ours, generally serve small and medium size businesses. The success of our practice is based on a few anchor clients and a number of smaller clients, most whom do not need audited financial statements. The number of privately held clients that need audited financial statements has been diminishing. As more firms compete for this dwindling market, the price of the audit falls. However, due to increased regulatory and disclosure requirements, and a rapidly dwindling labor supply, the cost of performing audits has greatly increased. Small firms must rely on selling additional value added services to clients in order to survive. If we are prevented from selling these services to our existing clients we will not survive. Also understand that IRS regulations have forced too many businesses to adopt calendar year-ends. Consequently, most of our audit work is concentrated during the period of time from January to April known as "busy season." This concentration of workload causes many additional problems. In order to survive, we must sell services to our clients that can be performed outside of "busy season". Preventing us from selling these services to our existing clients would complicate this solution and endanger our survival.
2. Small accounting firms would not be able to compete for competent technical personnel, thus contributing to a decline in audit quality. Today's economy has severely tightened the labor market and nowhere is this truer than in accounting. Students that a few years ago chose accounting as their major are now choosing careers in computer and other technical fields. Larger accounting firms who are able to pass on the recruits' escalating salaries to their larger clients are hiring the remaining eligible candidates. The smaller accounting firms must fight for a dwindling supply of candidates. The prospect of working on fewer audit clients in an increasingly busier "busy season" will only make attracting technically competent staff that much more difficult.
We believe that it will not only be accounting firms that suffer from the implications of the SEC's new regulations. It is well known that traditionally, CPA firms are a small business' closest and most competent business advisors. As the number of accounting firms declines, so will the small business community's access to reasonably priced accounting services. Lending institutions will also suffer, as they will be forced to make lending decisions without the aid of CPA prepared financial statements from their customers. Businesses will find credit more difficult to obtain.
Obviously, the issues involved with this matter are far-reaching and complex. Consequently it is perplexing to us why the SEC would issue these proposed regulations allowing only a 75-day comment period. This is too important an issue to be rushed through the approval process.
We urge the Commission to withdraw the proposed regulations, and establish a more reasonable approval process.
Charles B. Postal, CPA
Director of Quality Control