HOBE & LUCAS CPA'S, INC. 5005 ROCKSIDE ROAD, SUITE 430 INDEPENDENCE, OHIO 44131 (216) 524-8900 FAX: (216) 524-8777 August 20, 1998 Jonathan G. Katz Secretary Security Exchange Commission 450 5th Street N.W. Washington D.C. 20549 RE: File No. S7-16-98 Dear Mr. Katz: Upon review of your proposed amendment to define "improper professional conduct" as it appears in Rule 102(e) of the SEC's Rules of Practice, we thought it prudent to the profession to voice our concerns regarding the amendment. First, we do not believe that a single act of simple negligence - which the proposed amendment may well be interpreted to encompass - should ever constitute "improper professional conduct" for purposes of Rule 102(e). The federal securities laws neither expressly nor implicitly authorize the Commission to sanction professionals for negligent conduct. Rather, responsibility for the discipline of accountants rests primarily with state boards of accountancy and professional organizations. Introduction of a simple negligence standard in Rule 102(e) proceedings, therefore, would constitute an illegitimate expansion of the Commission's regulatory oversight powers. Second, the investing public benefits from accountants who feel free to exercise their best independent judgement. The SEC's proposed rule gives the SEC license to, with the benefit of hindsight, disagree with any one of the myriad of judgements accountants make in the preparation of financial statements and in the course of an audit, and thereby to subject them to sanction based solely on that disagreement. Such an environment obviously restricts accountants in the free exercise of their judgement to the detriment of financial reporting system. Third, sanctioning accountants for single acts of simple negligence is inconsistent with the purposes of Rule 102(e). The Commission promulgated the rule to protect the integrity of its processes, not to add an additional weapon to its enforcement arsenal. That is, the rule is supposed to serve a remedial, not punitive, purpose. Because a single act of simple negligence cannot give rise to a reasonable expectation concerning future behavior, or misbehavior, such an act cannot pose a threat to the Commission's processes. As a result, Rule 102(e) provides no basis for sanctioning such conduct. Fourth, the proposed rule does not directly further the SEC's purpose of ensuring accurate and complete disclosure insofar as the proposed rule would only require the presence of a "substantial risk" that a document might be materially misstated. The proposed rule thus adopts a standard that could result in an enforcement proceeding against the professional even where no misstatement has occurred. Fifth, the SEC's proposal, which the SEC states applies only to accountants, unjustifiably singles out the accounting profession for a more stringent standard of care than other professionals who practice before the Commission. As a matter of practice, the SEC has declined to bring actions against attorneys under Rule 102(e) where the attorney has not already been subject to professional discipline by a state bar, court, or similar body. In contrast, the SEC routinely initiates actions against accountants who have had no prior state board of accountancy or AICPA sanctions. Moreover, attorneys are not generally sanctioned for mere errors in judgement. Thus, the SEC's proposal would exacerbate an already unjustifiable discrimination against the accounting profession. Sixth, under the Commission's proposal, the SEC would be able to utilize a rule which has a threshold for imposing discipline much lower than the requirement imposed by Congress for officers and directors who violate the securities laws. As a result, as to accountants who are officers and directors of SEC registrants, the SEC in this proposed rule can bypass the explicit hurdles that Congress imposed for disciplining officers and directors under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, thereby increasing the exposure and risk to accountants in industry. Moreover, directors and officers are only subject to discipline when "substantial unfitness" is demonstrated - not simply errors in judgement. The incongruity of a disciplinary regime that would subject auditors to discipline under a far broader standard than management which has primary responsibility for financial reporting is manifest. For these reasons, we believe that a Rule 102(e) negligence standard with respect to accountants contravenes public policy, treats accountants in a discriminatory manner, and would actually diminish the vital role of accountants as guardians of the financial reporting system. It would be far better, for investors and accountants alike, if the Commission instead were to adopt the approach urged in the AICPA's rule making petition and sanction accountants only in the event of a knowing or conscious and deliberate violation of applicable professional standards or a pattern of misconduct that can be shown to create the required risk to the Commission's processes or the financial reporting system. Very truly yours, Hobe & Lucas, CPA's, Inc.