John K. Tarleton
1659 E Orangecrest Ave
Palm Harbor, FL 34683
June 20, 2002
Jonathan G. Katz
Secretary
U.S. Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549-0609
Re: S7-24-2
Dear Mr. Katz,
I welcome the opportunity to comment on the proposed SEC rule changes regarding auditor standards. In order to create an environment where the auditor is actually independent it would be necessary for the SEC to ban auditing firms from providing any type of consulting to the management of the company being audited. It is this relationship that causes the corruption of fair auditing practices. Currently the engagements are too long, a firm should be required to change auditors every two years and the same auditors should not audit a firm every time. This will prevent the relationships that often build between auditors and the client firm's management. It is the idea in auditing firms that if they want to keep the engagement of the large companies they must bend to the will of the corporate officers of the client. This often results in material differences and problems to be "overlooked" by auditors in the hope that their firm will not be fired. Criminal penalties should be included in any proposal both for the auditor and for the corporate officers to include a board of directors audit committee. This would deter any attempt to develop a creative accounting solution to a corporate problem.
I would also develop a rule preventing the financial analyst for brokerage firms from stating expected earnings numbers for companies. This is the core of the problem. Investors come to rely on those numbers and put pressure on corporate management to meet these expectations. This is further compounded by the existence of " whisper numbers" for if a firm does not meet the expectations of the analyst or the whisper number the share prices fall. This leads to shareholder complaints and under this pressure the financial managers for the company will come up with creative accounting practices to meet the expected numbers which are based on nothing more than a guess. In addition to the shareholder pressure now add the stock options that have been given to management. These often force an employee to do whatever is necessary to increase the share price so that he or she may benefit directly from the increase in the stock price.
What has evolved is a recipe for fraud personal employee gains, outside influences to out perform random goals and close relationships between auditors and clients. Creating oversight boards is not going to solve the problem, creating an environment where fairness and accuracy are enforced will solve the problem. This can only be accomplished by the above mentioned reforms.
Sincerely,
John K. Tarleton