Statement of William D. Travis
Concerning Auditor Independence Requirements

Securities and Exchange Commission Proposed Rule Amendments
Comment File No. S7-13-00

Public Hearings
September 20, 2000

My name is Bill Travis. I am the Managing Partner of McGladrey & Pullen, LLP, one of the eight largest CPA firms in the U.S. In August 1999, McGladrey became a part of an alternative practice structure when it sold its non attest assets and business to a new entity called RSM McGladrey, Inc., an indirect wholly-owned subsidiary of H&R Block, Inc. This transaction was completed to provide access to the capital necessary for us to significantly increase our rate of growth and profitability in a very competitive marketplace. Since that transaction, we have worked hard to design and implement a structure and the related policies to preserve our professional standing as a CPA firm, our reputation for quality and integrity, and our independence with respect to our audit clients. The SEC staff has been very helpful to us in accomplishing that objective.

I appreciate the opportunity to provide testimony regarding the Commission's proposal to modernize the auditor independence rules. We appreciate the efforts of the SEC staff to take on this important project. There are many positive elements in the initial proposal and we are supportive of this undertaking. In particular, we applaud the proposal to alleviate overly burdensome restrictions on investments and employment relationships involving audit clients and the families of certain audit firm personnel.

Today I will provide comments on certain aspects of the proposal that we believe requires further analysis and attention.

Working Together

Let me begin my comments by stating that I am proud to be a CPA and an audit partner in a CPA firm. Our profession has a long history of insisting that our members achieve a high level of technical competence and personal integrity. The profession has consistently demonstrated a commitment to continuous improvement by investing in enhancements to the profession and by providing experienced advice to help our clients grow and prosper. The audit profession has carefully maintained its good standing through the delivery of independent and objective audit, tax and business consulting services.

I have been very impressed with the talent and commitment to excellence of the CPA audit professionals and the SEC staff that I have had the good fortune of working with over the last few years. I believe that we both want what is best for the public interest and the audit profession.

On a personal level, I am very concerned that the negative publicity surrounding the independence debate will adversely affect the audit profession and the public interest. I strongly recommend that the profession and the SEC work together to resolve our differences on a timely basis. I fear that continuing to debate the issues in the press will cause irreparable harm to the audit profession. From our perspective, the negativity is already creating problems for the profession in attracting and retaining the best and brightest talent.

Independence Standards Board

We suggest that the Independence Standards Board (ISB) be included in the process to assess the input received from this public debate and to help identify and develop enhancements and modifications to the proposal. The ISB Board is comprised of an equal number of representatives from the profession and the public sector and would provide an unbiased view of the public comments. The ISB Board members and management are extremely experienced, competent and committed to the public interest. They would be valuable resources in the assessment and enhancement of the independence rules for the auditors of public companies.

General Standard

We believe it is appropriate to build the foundation for specific applications around a general standard and supporting principles. This approach will help persons inside and outside the audit profession understand the basic concepts of independence. We offer the following additional comments-

Investments by the Audit Client in the Auditor

Proposed rule 2-01(c)(1)(iv)(A) provides that an auditor's independence is impaired when the audit client or an affiliate of an audit client has, or has agreed to acquire, any direct investment in the audit firm or its affiliate. The discussion regarding this proposal cites two reasons: (i) the auditor may have to audit the value of the securities of the audit firm or its affiliates, and (ii) the auditor would have a mutuality of financial interest with the audit client-shareholder. We provide the following comments regarding this proposed rule-

Scope of Services

We disagree with certain aspects of the proposal to broaden the service restriction placed on auditors of public companies. We believe this portion of the proposal may be, to some degree, a solution looking for a problem. We understand that neither the Commission nor the profession have identified a material number of financial reporting problems created as a result of the scope of services provided to the audit client. Additionally, we do not believe that the recent improvements in audit committees have been in place long enough to determine whether additional rulemaking in this area is necessary and cost beneficial. It seems to us that audit committees should be able to adequately assess what is best for the audit client. As a result, we recommend that adequate due process be performed before expanding the scope of services restrictions. Please consider the following-

Affiliate of an Accounting Firm

We believe the definition of an "affiliate of an accounting firm" is too broad and, as a result, will sweep in other audit firms and other business relationships that are truly outside the sphere of control and significant influence of the audit firm. If our understanding is correct, this definition would include other U.S. and foreign firms affiliated with the audit firm through licensing, franchising or other cooperative marketing arrangements but for which the audit firm has no financial or operation control. This proposal is not workable and will cause a significant increase in the amount and cost of independence monitoring and compliance work with little or no real benefit to the public interest.

Contingent Fees

We believe additional clarification is needed to help distinguish between contingent fees and billing for value. We do not believe the SEC should be involved in determining what the value of services are.

Proxy Disclosure Requirement

We do not object to the proposal for proxy disclosure of fees paid to the audit firm. However, since facts and circumstances play a major role in the magnitude of professional fees, we do believe the materiality limits are unreasonably low and question the value to be derived from the disclosure.


I thank you for allowing me to present our views on this important proposal. We are supportive of this project and recommend that the SEC invest adequate time to gather and understand informed input, seek the involvement of the ISB and work together with the audit profession to resolve our differences.

Thank you,

William D. Travis
Managing Partner