Summary Of Intended Testimony Of Robert R. Garland Of Deloitte & Touche LLP

1. The Commission's recent rulemaking proposal on auditor independence raises serious matters of great public interest. Although we have not had an adequate opportunity to provide testimony on the specifics of the proposal, we have serious concerns with the appearance-based standard and the scope of service restrictions contained in the rule. This rulemaking is a very serious matter: the SEC must proceed with caution and provide all sectors of the public with ample time to analyze the proposal and comment.

2. Those aspects of the proposed rule involving the appearance-based standard for auditor independence and the exclusionary ban on services are not in the public interest. The push to regulate the scope of services that an accounting firm may provide to an audit client is already moving the profession toward an untested model. If adopted, the proposed rule threatens rapidly to push the remainder of the profession into that model.

3. There is no evidence of any problem that needs to be addressed through a rule limiting the scope of services an accounting firm may provide to an audit client. The proposal cites to no empirical evidence, analytical study, or legal decision that has identified any impairment in audit quality or auditor independence caused by the current scope of services. Given what is at stake, the lack of any evidence of a problem is a compelling argument against the rulemaking. It is irresponsible to take the risk inherent in the proposal without demonstrating either a compel1ing need or a major benefit. The proposal does neither.

4. The lack of any empirical evidence of a problem cannot be justified on the ground that it is too hard to find. The Commission undoubtedly looked for evidence of impairments in audit quality or auditor independence attributable to the scope of services provided to an audit client, but found none. Moreover, the proposal does not even conclude that there is a statistical correlation between independence or audit failures on the one hand, and provision of a disproportionate amount of non-audit services on the other hand. The Commission has access to all of the data necessary to undertake that statistical study, but no mention is made of any such study. In the absence of even a statistical correlation showing an unusually high degree of non-audit services performed in instances where there were demonstrated audit or independence failures, the lack of evidence of a problem is significant, and it cannot be dismissed as evidence that could never be objectively determined.

5. This rule proposal is not a minor modification to an arcane accounting principle - it is a draconian measure that will have a massive impact. The proposing release suggests that no significant effect will be felt by accounting firms because the Big 5 firms will simply reshuffle their non-audit clients. That assertion, of course, ignores the impact on other smaller accounting firms, not to mention on public company clients. In any event, logic demonstrates that the more likely economic result is to split services that impose a mutual constraint on market opportunities. When such a split occurs, the remaining audit entity will lose crucial areas of skill and professional expertise.

6. The breadth of practice accounting firms are able to maintain through offering both audit and non-audit services is an important component of providing quality audits. Significant non-auditor resources are used in the audit of virtually every complex public company, and that - trend is increasing as the economy continues to become more specialized and technology-dependent. To force accounting firms to rely on outside providers of these services would subject clients, investors, and others to inconsistency, less effective work, increased costs, and less assurance of independence.

7. It is incorrect to suggest that because two or three; of the Big 5 have decided to split their auditing and non-auditing practices, the proposed rule is a good idea or will not have a harmful effect. It is too soon to tell whether the resulting loss in practice areas and skills at those firms will harm the quality of their audit practices. It is similarly too soon to know what impact those changes will have on their future ability to adapt to the changing needs of the New Economy, or their ability to recruit and retain the best talent.

8. Given the profound impact the proposed rules would have and the lack of any empirical evidence supporting the regulation, the Commission should not go forward with this proposal at all. If the Commission is determined to proceed with the rulemaking process, we strongly encourage the Commission to take steps to ensure that there is a full and fair opportunity for all members of the public to participate in the process. In our view, the comment period is too short and the proposal too complex to serve the public interest. The proposal poses more than 400 questions, seeks complex data analysis, and sets out a variety of alternatives. It is simply unrealistic to presume that the public will be able to provide meaningful input in the current process. The comment period should be extended, and if the Commission should determine to pursue a scope of services restriction, a more definite rule proposal should be re-proposed for focused public debate.

9. We look forward to testifying again in September, at which time we will provide more detailed testimony on specific aspects of the proposed rule.