September 5, 2000
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, D.C. 20549-0609
Subject: Revision of the Commission's Auditor Independence Requirements
SEC File No. S7-13-00
Dear: Ladies and Gentlemen
We appreciate the opportunity to participate in the hearings concerning the SEC Independence Rules Proposal.
As we all know times change and with change come new challenges. Times have changed in the accounting profession and yet some of the basic fundamentals and principles remain with us. There is no question that the challenges to keep these basic principles sound and in good stead are more difficult today. Accounting firms have changed in the last twenty-five years and expanded beyond the traditional core services once offered by them. In fact some of the expanded services are now considered core services with firms. These additional services have been in reply to the wishes and demands of clients and a response to the needs of CPA firms to grow and develop to provide a future for their people by attracting staff with a diverse and wide range of competencies.
Auditor independence is a core principle to CPA firms. Independence in fact and appearance has been the backbone of the accounting profession and the main reason why the accountants are still considered the most trusted professionals.
We have some concerns as to the purpose of the new auditor independence requirements, when other formalized measures have been established to deal with
independence concerns. We specifically refer to the work of the Independence Standards Board (ISB) and the new disclosure and audit committee requirements issued by them. Will this proposal undermine the work of the ISB and actually add additional confusion to this already complex area? We support the actions recently taken by the ISB and SEC to bring independence matters to the attention of audit committees. With the implementation of these new requirements, it seems that we are not giving any time to measure the effectiveness of the audit committee oversight.
The Proposal will have significant consequences on the accounting profession and require careful consideration by all parties. It is impossible with the short time period to respond to all of the 400 questions included in the Proposed Rule. We would like to address two specific issues included in the SEC Independence Rules Proposal:
1. The relaxed rules of financial interests in registrants by members of the audit firm.
2. Non-audit services provided by CPA firms and the impact on auditor independence.
There is no question that the current independence rules as they relate to financial interests by audit firm personnel in registrants are in need of revision and we support the SEC in it's effort to revise these rules. We do have some concerns with the extent to which the rules have been relaxed. We specifically call to your attention the rule involving "covered persons." The rule prohibits dependent children of "covered persons" from having a financial interest. We believe that the rule should be extended to include adult children. In fact, we would recommend that lineal descendents of a "covered person" should be precluded from having a financial interest. We realize that adult children are not necessarily under the control of a parent; however, the appearance and the ties are too close and leave too much opportunity for an impairment of independence.
We would also recommend that you address the retirement plans of people having close relationships with "covered persons." Specifically, the spouse or spousal equivalent may be employed with a retirement plan by his/her employer that is not self directed. We do not believe that the financial interest rule should apply since the closely related person has no choice or influence on the investment of such funds. This clearly can happen without the knowledge of the "covered person" or the closely related person and could help minimize the efforts to insure independence by firms.
The proposed independence rules virtually eliminate the performance of non-audit services for audit clients. Based on our understanding of the proposed rules and previous comments in the July hearing, the new rules are centered on the appearance of independence. As a CPA in public practice for 36 years, I have seen the changes occur in our practice and profession. As a member of the Iowa Accountancy Examining Board, we also see the profession from the aspect of a regulator. In the last twenty-five years, the practice of accountancy has changed significantly with the addition of core services for each firm increasing to a current level far beyond our early visions. The core services in CPA firms today include information technology, valuation and forensic services, e-commerce consulting and many others. The increase in these core services is a result of increased demand by business including clients of firms to provide these services. In many cases, the most reliable vendor of these services is the company's audit firm.
In reviewing the report of the Panel on Audit Effectiveness, they clearly did not indicate that an audit failure was caused by a firm's performance of non-audit services. To the contrary, they have clearly indicated that they could find no correlation to the performance of non-audit services. We would recommend further study prior to changing the rules for independence.
The term advocate is used many times in the proposal. In many instances, a CPA can provide services to a client and not be considered an advocate. We believe that a firm can be an advocate for a client and still maintain independence. For instance, the work an accounting firm does in connection with a tax examination, results in the firm sometimes being an advocate for the client. We do not believe that this relationship impairs the independence of the firm and you have not indicated in your proposal that this would impair independence. We believe that this parallels many of the other non-audit services that you have listed as potentially impairing independence.
The specific non-audit service that we address is the expert witness services performed by accounting firms for audit clients. In most instances, the services performed in this area would not involve the members of the audit team. The engagement would usually involve the client's law firm, with the attorney determining the necessity of an expert witness. In many cases, the accounting firm is actually engaged by the law firm to work directly for them on the matter. The client will obviously be paying the fees for these services, but the engagement is really with the law firm. There is no question that the attorney and the law firm are advocates for their client and afforded many privileges of confidentiality. The accounting firm is in many jurisdictions, required to comply with Federal Rule 26 and disclose the bases for expert opinions in a written report. The report will include a brief description of facts, work performed, expert opinion, the bases for the expert opinion, qualifications of the expert and listing of depositions and testimony in the last three years. The slightest appearance of advocacy will impair the effectiveness of the expert before the judicial system.
We believe that the entire matter of non-audit services deserves further study before you determine which services actually impair the independence of auditors.
Thank you for the opportunity to share our comments with you. We encourage the SEC to compare these proposals with the Independence Standards Board and work with and involve them in the process of developing these new rules.
IOWA ACCOUNTANCY EXAMINING BOARD
Ronald E. Nielsen CPA/ABV, CFE, CVA
RONALD E. NIELSEN, CPA/ABV, CFE, CVA
Member of the Iowa Accountancy Examining Board.
Member in the firm of Clifton Gunderson, P.L.C., Certified Public Accountants and Consultants.
Certified Public Accountant in the practice of public accounting for over 36 years.
Hold additional credentials of:
Involved in the general practice of public accounting for 36 years including audit, tax and more recently, in consulting services.
Served as team captain for conducting peer reviews of SECPS member firms.
Served on the Iowa Accountancy Examining Board for the last 3 years.
Chaired the Uniform Accountancy Act taskforce in Iowa
Served on the National Association of Boards of Accountancy Ethics Committee this past year.