Subject: Re: Proposed Amendment to Rule 102(e)

Date:    8/1/98 11:40 AM
     
     
Mike:
     
Rather than formally submitting these comments, I will pass them along to 
you informally.  If you think they make sense and should be part of the 
official record, I can submit them formally to the comment "hot-line".
     
First, while I am not familiar with all the background, it seems that this 
rule will fill a gap in the current guidance provided to auditors and 
accountants with regard to what constitutes improper professional conduct. 
While the prior rule is focused on intent, the amendment addresses 
unintentional but "unreasonable"  violations that are either a substantial 
risk or, if not substantial risks, are repeated.  Certainly non-intentional 
negligent conduct could pose a threat to investor protection.  
     
The two main concerns / suggestions I have are as follows:
     
1.  The key to the new categories is an "unreasonable" violation.  Perhaps 
this term is well-defined elsewhere in the securities laws of within the 
professional standards but nowhere in the Release (at least that I can 
find) is it defined.   Perhaps a cite to the relevant literature or a brief 
discussion of what it means in the this particular case is warranted. 
Without all the background on the AICPA proposal (ah, to attend those Regs. 
Committee Meetings again), I wondered if this term is part of the 
difference between the current proposal and the AICPA position.  Perhaps 
the distinction between reasonable and unreasonable can be worked into the 
example(s). 
     
2.  Related to the last point, and recognizing the danger in circumscribing 
the rule's applicability by use of examples, while an example is given to 
illustrate the conditions under B.1., no example is provided for B.2.  For 
completeness and to drive home the importance of repeated violations, 
perhaps the cash count example could be extended.  One way is to change the 
scenario to a case where cash counts or some other standard audit procedure 
was not being performed or was being performed in an ad-hoc basis across 
several audits.  While each of the audits is independent in terms of the 
materiality, and hence, the degree of substantial risk, part B.1. 
conditions would not be met.  Nonetheless, because of the pattern involving 
the same accountant or auditor across several registrants, there is 
heightened concern about the reliability of the work conducted by that 
auditor on other registrants (even those not specific to the cash counts in 
question). 
     
How about this as an alternative example, if you do not want to push the 
cash count scenario?  An accountant recommends non-GAAP accounting 
treatment to transactions for several clients that individually do not 
involve a material misstatement of the financial statements but reflects 
ignorance of GAAP.  This example is a bit flawed if the accountant can 
argue that the non-GAAP method(s) are o.k. since the impact is immaterial.
     
Hope these comments are useful.
     
Best regards, 
     

Terry Warfield
PricewaterhouseCoopers Research Scholar 
Associate Professor
University of Wisconsin
975 University Avenue
Madison, WI  53706-1323