PricewaterhouseCoopers LLPNovember 25, 2002 Mr. Jonathan G. Katz, Secretary
Re: File Number S7-39-02 Dear Mr. Katz: We at PricewaterhouseCoopers LLP appreciate the opportunity to comment on the Commission's Proposed Rule: Improper Influence on Conduct of Audits required by Section 303 of the Sarbanes-Oxley Act of 2002. We fully support the Commission's efforts to further strengthen existing rules in Regulation 13B-2 by specifically prohibiting officers or directors, and persons acting under their direction, from fraudulently influencing, coercing, manipulating, or misleading any independent public or certified accountant engaged in the performance of an audit of the financial statements of an issuer. However, in order to achieve greater public interest and investor protection, the scope of persons covered under the Commissions proposed rule should be more expansive. We have several comments that we respectfully submit to the Commission for your consideration. Our more significant comments on the proposal are summarized in this cover letter. We have provided more detailed responses to the specific questions the Commission asked within the proposed rule in Exhibit A attached to this letter. The scope of the proposed rule should be more broadly defined and should not be restricted to "any other person acting under the direction" of an officer or director. The proposed rule should include all other individuals, within the company and outside parties or individuals that provide services to the company, who have responsibilities for or perform activities relevant to financials statements or the preparation thereof. The intent of the rule is to deter individuals involved in an audit process from taking actions to fraudulently influence, coerce, manipulate or mislead the auditor of the issuer's financial statements for the purpose of rendering the financial statements misleading. We believe the actions of all other individuals, within the company and outside parties or individuals that provide services to the company, who participate or are involved in the audit process, including those who interact with an auditor during the engagement period, or have responsibility for or perform activities relevant to the financial statements or the preparation thereof, regardless of whether or not they are acting under the direction of an officer or director of the company, should be covered by the rule. We recommend that the SEC consider clarifying the applicability of the proposed rule beyond 1934 Act reports and 1933 Act consents currently referenced in the proposed rule. We believe the rule should also apply to an accountants' involvement in all filings with the Commission, regardless of whether the filings are required by registrants of the SEC or voluntarily filed, as well as to reviews and attestation work performed by the auditor. All of these activities require the auditor to rely on statements made by a variety of individuals within the organization and others that provide services to the company. Additionally, the proposed rule should also apply to internal control attestations filed with the Commission (N-SAR for investment companies; 17-Ad-13 for transfer agents; Rule 206 security counts for investment advisers; attestation to, and the auditor's report on, management's internal control report as proposed by the SECs rule related to Section 404(b) of the Sarbanes-Oxley Act). ********** We appreciate the opportunity to express our views and we commend the Commission and its Staff for the speed in which it continues to focus on protecting the public interest and strengthening investor confidence. We will be pleased to discuss any of our comments or answer any questions that you may have. Please do not hesitate to contact Deborah Sugden (973) 236-4985 or James F. Harrington at (973) 236-7203 regarding our submission.
Questions
The Commission's proposed rule 13B2-2(b)(1) addresses activities by an officer or director of an issuer, or any other person acting under the direction of an officer or director. While we agree with the Commission's definitions of "officer" and "director" we believe the phrase "and any person routinely performing corresponding functions," within the definition of "officer," should be more specific as to the type of individuals this phrase intends to encompass. We believe the Commission's proposed definition should specifically include the chief information officer, chief legal officer (or general counsel), and general auditor. Providing more clarity to the reader of the rule will reduce likelihood of misinterpretation and allow the rule to be enforced more effectively. Yes. We believe the scope of the proposed rule should be more broadly defined and should not be restricted to "any other person acting under the direction" of an officer or director. We believe all other individuals, within the company and outside parties or individuals that provide services to the company, who have responsibilities for or perform activities relevant to financials statements or the preparation thereof should be covered by the proposed rule. Since the intent of the rule is to deter individuals involved in an audit process from taking actions to fraudulently influence, coerce, manipulate or mislead the auditor of the issuer's financial statements for the purpose of rendering the financial statements misleading, the rule's scope should be expanded to include all individuals related to the audit process. Specifically, we believe the actions of all individuals, within the company and outside parties or individuals that provide services to the company, who participate or are involved in the audit process, including those who interact with an auditor during the engagement period, or have responsibility for or perform activities relevant to the financial statements or the preparation thereof, regardless of whether or not they are acting under the direction of an officer or director of the company, should be covered by the rule. Additionally, we agree with the Commission's inclusion of other individuals under the scope of this rule, beyond the issuer's employees, such as, customers, vendors, creditors, attorneys, securities professionals, or other advisors who provide false or misleading information to auditors. We believe it is appropriate to include examples of the types of conduct that might constitute actions to fraudulently influence an auditor as they are currently set forth in the proposed rule, however, the rule should specifically say they are examples and may not be all inclusive. We suggest that the bullet relating to "providing an auditor with inaccurate or misleading legal analysis" should be expanded to include all other types of analyses provided to an auditor. Furthermore, we suggest adding an example of the type of conduct that might constitute improper influence that states, "Providing an auditor with false or misleading information in an auditor's request for confirmation." The process of confirming information with third parties is an audit procedure that occurs on almost every audit engagement and is worth highlighting as an example of the type of conduct that, if not honestly replied to, could result in an individual being in violation of this rule. Yes. We believe the phrase "independent public or certified public accountant" should be used consistently. We agree with the Commissions interpretation of Congress' intent that the phrase "engaged in the performance of an audit" be given a broad reading. We believe it would be helpful to the reader of the rule to clearly define the meaning of the phrase "engaged in the performance of an audit." We suggest that the definition of this phrase include wording that is similar to the wording used in the discussion section of the Commission's proposed rule that states (it is) "... intended that the phrase encompass the professional engagement period and any other time the auditor is called upon to make decisions regarding the issuer's financial statements, including during negotiations for retention of the auditor and subsequent to the professional engagement period when the auditor is considering whether to issue a consent on the use of prior years' audit reports. The proposed rules , therefore, would apply throughout the professional engagement and after the professional engagement has ended when the auditor is considering whether to consent to the use of, reissue, or withdraw prior audit reports. In limited circumstances, the proposed rules also may apply before the professional engagement begins." We believe subparagraph (b) (2) of the proposed rule provides some additional level of interpretation as to the type of actions that, if successful, could result in rendering an issuer's financial statements misleading and, therefore, should be included in the proposed rule. In our opinion, the extent of the examples is appropriate. We believe it is necessary to expressly extend the prohibition on improper influence on the conduct of audits, and existing rule 13b2-2, to officers and directors of the investment company's service providers. We also recommend that the rule expressly include accounting personnel at the investment company's service providers. Specifically, officers, directors, and accounting personnel working for an investment company's custodian, transfer agent, investment advisor, or other service provider should be directly named as personnel prohibited from making false statements to auditors. Service provider personnel may have their own independent motivation to misstate or conceal errors, fraud, weak controls, or incompetence from everyone involved in the financial reporting process including auditors, fund management, and even the outside service provider's own management. Limiting the cause of action to acts under the direction of fund management is insufficient to reach these cases. We believe that the cost of compliance with the proposed rules in not significant and therefore there should be no differences in the proposed rules for small companies. Additional Comments: Applicability of the Proposed Rule We believe the rule should also apply to an accountants' involvement in all filings with the Commission, regardless of whether the filings are required by registrants of the SEC or voluntarily filed, as well as to reviews and attestation work performed by the auditor, as all of these activities require the auditor to rely on statements made by a variety of individuals within the organization and others that provide services to the company. Additionally, the proposal should also apply to internal control attestations filed with the Commission (N-SAR for investment companies; 17-Ad-13 for transfer agents; Rule 206 security counts for investment advisers; attestation to, and the auditor's report on, management's internal control report as proposed by the SECs rule related to Section 404(b) of the Sarbanes-Oxley Act). Reporting Violations We believe the Commission should provide guidance as to how a violation, once identified, should be reported. The proposed rule should clarify whether violations of this rule should be reported similar to the way illegal acts or 10A situations are reported or should specifically outline the steps that should be taken if a broader level of reporting responsibility is intended. |