September 22, 2000
Jonathan G. Katz, Secretary
Securities and Exchange Commission
Re: File No. S7-13-00
Dear Mr. Katz:
This letter is in regards to the proposed rule, "Revision of the Commission's Auditor Independence Requirements".
The AICPA and the recently formed Independent Standards Board have both established rules regarding auditor's independence. These rules are constantly being evaluated and updated for developing "issues". It is questionable whether another set of rules will be beneficial to the public and the profession. I feel that the public would be better served to allow the Independence Standards Board (ISB), in coordination with the AICPA and yourselves, to determine a single set of standards. This would simplify the process that the public and accountant's would have to determine if the auditor's "appear" to be independent. In regards to independent "in fact", this is subjective and can't be determined by setting guidelines.
The accounting profession has always provided other forms of services besides its attest functions. The AICPA has addressed the other services in their standards and through their interpretations. It would appear that the ISB would be able to do the same, utilizing the AICPA'S standards as a starting point.
Professional standards as prescribed by the AICPA generally allow accountant's to perform various functions for clients, as long as the accountant does not act as management and does not "create" the transaction or information. Under this guise the accountant of a non-SEC client is able to perform bookkeeping functions and perform other record keeping functions, such as for retirement plans and related areas. I believe the key to independence is that the auditor does not function as management. Secondly, the auditing firm should not have potential gain, either monetarily or in preserving their "reputation" from services they provide.
In this regard, I feel your focus should be on the obvious areas of concern, without focusing on certain services, such as valuations, expert testimony, and other attest engagements. The valuation services have guidelines that the individual performing the service must follow. Their report discloses the methods and theories uses, so it would appear that a reader would be fully informed as to the process. In expert testimony the judge and/or jury makes a decision based on all the factors that they determine relevant. Likewise, in other attest engagements the accountant/auditor sets out their procedures and conclusions. Therefore, in these instances the public receives full disclosure.
In regards to services, such as investment sales, the accountant/auditor can gain by a commission or fee(s). These services should impair independence as it not totally earned for work performed for the client, without some alternative gain.
Consulting is an area that the accountant/auditor generally has the knowledge to assist in. So that it should generally be allowed, except in situations where the accountant will have "some alternative gain".
"In your proposal you indicate that the auditing firm should present a detail list of its billings to the audit client for all work performed, audit and non-audit. This at a minimum will be confusing to the shareholder and director. Implication is that the auditing firm may be performing services that contradict their work as auditor's or is assuming a position of management. If the auditing firm does this then they are not independent under current AICPA standards. However, review of fees charged for projects does not enable the board or shareholder's to make this assessment.
In regards to direct financial interest, I agree with your position on not allowing the ownership of stock in the company being audited. This could directly result in making an "improper" audit entry or knowledge similar to other insiders. Further, public perception of the auditor's interest in the client would taint the relationship. Similarly a debtor-creditor relationship is also of similar concern. However, to the extent that unrelated interests of entities that is something that I feel needs to be revisited in your proposal.
The formation of separate companies, in order to allow consulting and audit services to be performed, would appear to be a solution. It would not affect the big five, as it would the smaller accounting firms, who cannot afford the luxury of selected practices. However, I believe you should focus on areas where the accountant/auditor can gain in, and not the expert or other attest functions. The areas I would see restriction in would be areas where the accountant/ auditor is receiving "some alternative gain".
Thank you for your consideration.
McDermott & Miller
Michael W. Wassinger
Firm Director of Accounting & Auditing