The following letter was properly addressed to the following:
Securities and Exchange Commission
Jonathan G. Katz, Secretary (3 copies)
Chairman Arthur Levitt
Commissioner Paul R. Casey
Commissioner Isaac C. Hunt, Jr.
Commissioner Laura S. Unger
Senator Sam Brownback Kansas
Senator Pat Roberts Kansas
Congressman Dennis Moore Kansas
September 20, 2000
Re: SEC's Proposed Rule Governing Auditor Independence
I strongly oppose the SEC's proposed rule governing auditor independence for the following reasons:
1. The SEC's decision to fast-forward its proposed rule prohibiting non-audit services without waiting for facts or evidence. What's the big hurry? In its rush to regulate, the SEC has:
(a) Set up a schedule apparently designed to avoid Congressional oversight and thus will avoid meaningful public participation.
(b) Waited until the tail end of the Clinton Administration to railroad through a radical rule to restructure the accounting profession, without permitting time for informed oversight, or policy participation by Congress or the new administration.
(c) Limited the period for commenting on a far-reaching and complex proposal to only 75 days. This includes the answering of 400 questions, collecting and analyzing tons of data coupled with the consideration of alternate concepts for regulating independence.
(d) Pre-empted the work of the Independence Standards Board (ISB). This board was set up three years ago at the initiative of the SEC and should be given time to complete its work before making sweeping changes as proposed.
(e) Not allowed time for important recent reforms to work. This includes new disclosure and audit committee requirements that were adopted by the ISB, the NYSE, the NASD, the American Stock Exchange and the SEC.
2. The SEC even admits there is no evidence that non-audit services have compromised audit quality or auditor independence. Quite the contrary, there is strong evidence non-audit services have actually boosted the auditors independence. For example:
(a) Non-audit services provide additional opportunities to monitor and observe the client's operations and gain insight into what is going on. Even with extra audit time, there is not guarantee the auditor would not overlook some vital bit of information that he would have gained as a natural by-product from his non-audit services.
(b) Non-audit services provide an extra source of income for CPA's. With the "off-limits" restrictions placed on these services, audit firms will become overly or exclusively dependent on audit fees. This will help undermine auditor independence.
3. The SEC failed to consider the dangerous snowball effect likely to be set in motion by the proposed rule with its usual power to set a precedent for other regulators. Based on past experience, we can expect this new SEC rule to be viewed as a model for state boards of accountancy as well as federal regulators such as banking and ERISA. All this will result in bad news for most CPA's.
4. The SEC proposal will force tough choices for business executives as well as CPA firms. CPA firms must decide whether to give up its audit or non-audit services for a client. This decision may be made for them by the client. The CPA firm may have to give up its audit department if most of its clients prefer its non-audit services. This may also be decided depending on which service is the most lucrative. Business firms located in small towns in rural areas may be forced to find a new CPA audit firm or non-audit firm located in some distant city at higher costs due to extra travel expenses and probable higher rates.
5. Preparing tax returns has traditionally provided a major supplement to a CPA firms income. The SEC claims its proposed rule "would not affect tax-related services". However, if it prohibits CPA's from representing their audit clients before the IRS, how much of this business would they lose? How many clients will want a tax preparer that is banned from representing them.
6. The proposed SEC rule would have a negative effect on recruiting and retention of the best talent. The best and brightest students will likely join the non-audit service firms where the career opportunities are unlimited. The "audit only" firms will probably have a tough time finding the necessary talent to provide the required quality audits when 25% to 40% of their market is off-limits.
7. "Audit only" firms would be restricted from activities with nearly any entity which would represent a commercially valuable business relationship because this would be viewed as an "affiliate of the accounting firm". In addition, these accounting firms would be prevented from entering into almost any joint venture or partnership because this might impair their independence, even though its investment may be immaterial and have no control.
8. The SEC lacks authority to make sweeping rules to govern and regulate the accounting profession based on its alleged concerns relating to the "appearance of independence" but not based on facts.
9. The current Panel on Audit Effectiveness of the Public Oversight Board, a panel formed at the request of the SEC, concluded that, "both the profession and the quality of audits are fundamentally sound". This panel said it could find no evidence that non-audit services had hurt audit quality. Just the opposite, it concluded that in numerous instances non-audit services contributed to a more effective audit. All this was ignored by the SEC.
10. Finally, the SEC's proposal to restrict non-audit services offered by accounting firms represents a fundamental restructuring of a profession. This may be a noble attempt to fix a profession that has successfully given investors the reliable, independent financial data they have needed for the past century. However, it just seems wrong here in America, when a government agency, such as the SEC, can seize dictatorial powers to make laws that by-pass Congress and the President, and that tell a profession whom they can offer services and other businesses from whom they may buy services.
Dwight E. Reece, CPA