National Association of Real Estate Investment Trusts
1875 I Street NW, Suite 600
Washington, DC 20006

November 25, 2002


Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
Mail Stop 6-9
450 Fifth Street, NW
Washington, DC 20549-6009

Re: Improper Influence on Conduct of Audits (File No. S7-39-02)

Dear Mr. Katz:

The National Association of Real Estate Investment Trusts® ("NAREIT®") welcomes this opportunity to respond to the request for comments from the Securities and Exchange Commission ("Commission") on various proposals contained in Release No. 34-46685 ("Release"). NAREIT is the national trade association for real estate investment trusts ("REITs") and other publicly traded real estate companies. Members include real estate investment trusts (REITs) and other businesses that own, operate, and finance income-producing real estate, as well as those firms and individuals who advise, study and service those businesses.

Executive Summary

NAREIT supports the Commission's efforts to implement the Sarbanes-Oxley Act of 2002 ("Act"). We generally support the proposed Commission rule implementing Section 303(a) of the Act regarding improper influence on conduct of audits. However, we believe that a few of the proposals need to be clarified by the Commission. For example, the Commission should clarify that providing an auditor with inaccurate or misleading legal analysis will be covered only if it was an intentional act. Additionally, public companies should be able to replace an auditor without the negative implication that it was done for the purpose of rendering a financial statement materially misleading. Also, NAREIT supports retaining the terms "under the direction" in subparagraphs (b)(1) and (c) and "fraudulently" in subparagraphs (b)(1) and (c)(2) of the proposed rule.

Cancellation of Existing Non-Audit or Audit Engagements

The proposal identifies a number of types of conduct that the Commission believes might constitute "improper influence" on the conduct of an audit. Included among these is threatening to cancel existing non-audit or audit engagements. There are many valid reasons for a company to change its auditing firm. They would include but not be limited to:

  • Changes in the company's type of business;

  • Need for specialized expertise;

  • Changes in significant business locations, such as the initiation of global operations;

  • A decision to rotate audit firms; and

  • A significant change in the size of the company.

While NAREIT agrees with this specific proposal, we request that the final rule acknowledge that a company's changing audit firms between audit engagements does not by itself imply a violation of the rule.

Stronger Wording Being Considered

In Section II B, 1 through 3 of the proposed Rule, the Commission indicates that it is considering the use of stronger wording to make the rule effective.

The change from "under the direction of" to "at the behest of" or "on behalf of" would indicate that no specific direction by an officer or director is required to violate the proposed rules. We believe that an officer or director should not be held responsible for the fraudulent acts of subordinates unless such action was taken at the specific direction of the officer or director. Further, the terms under consideration are vague as to their meaning and application. We hold similar views with respect to the considered change that would replace the word "fraudulently" with the word "improperly." And finally, we believe that removing the requirement of intent in order for an action to be in violation of the rule goes well beyond the intention of the Act. It seems to us that the purpose of the Act is to achieve more transparent and informative financial reporting and not to punish unintended consequences.

NAREIT thanks the Commission for this opportunity to comment on the Release. Please contact Robert Cohen, NAREIT's National Policy Counsel, at (202) 739-9415 if you would like to discuss our comments in more detail.

Respectfully submitted,

George Yungmann
Vice President, Financial Standards