American Institute of Certified Public Accountants
November 25, 2002
Jonathan G. Katz
Re: Comments Regarding SEC File No. S7-39-02
Members and Staff of the Commission:
The American Institute of Certified Public Accountants (the "AICPA") respectfully submits the following written comments on the Securities and Exchange Commission's (the "SEC" or the "Commission") proposed rules regarding improper influence on the conduct of audits (the "Proposal").1 The AICPA is the largest professional association of certified public accountants in the United States, with more than 350,000 members in business, industry, public practice, government and education.
The AICPA acknowledges the enormous effort put forth by the members and staff of the Commission to implement the provisions of the Sarbanes-Oxley Act of 2002 (the "Act"). We are firmly committed to working with the Commission in accomplishing the timely and effective implementation of the Act and rebuilding the faith of investors who depend on accounting professionals for accurate, clear, timely and relevant financial information.
The AICPA Supports A Broader Prohibition On Misleading Auditors
The AICPA strongly supports the Commission's recommendation to prohibit any officer or director of an issuer, or any person acting under the direction thereof, from misleading an auditor. We would, however, recommend that the proposal be broadened to include not only officers and directors but anyone - whether internal or external to the company - who lies to or misleads an auditor.
Accurate and reliable financial statements are the product of two separate activities. The first is the preparation of the statement by the issuer. The second is the audit of the statement by the auditor. Any action by any person involved in the preparation of the financial statement or in the production of information for the auditor to use in the audit to influence, coerce, manipulate, or mislead the auditor will have an adverse impact on the ability of the auditor to do his or her job. Therefore, to further protect the public interest, we would propose that the Commission's recommendation be broad enough to cover any person, whether internal or external to the issuer, who acts improperly in this regard.
The AICPA recommends that proposed Rule 13b2-2(b)(1) should read:
The Commission has ample authority to implement this recommendation. First, as the Commission is well aware, Section 23(a) of the Securities Exchange Act grants the Commission broad rulemaking authority to "make such rules and regulations as may be necessary or appropriate to implement the provisions of this title for which [the Commission is] responsible or for the execution of the functions vested in [the Commission] by this title . . . ."2 Second, Section 303(c) of the Act expressly states that the provisions of Section 303(a) do not preempt any existing Commission rule or rulemaking authority.
For the reasons set forth below, the AICPA believes that implementing such a broad prohibition on misleading auditors is a necessary component of restoring investor confidence in the accuracy and integrity of financial statements.
Responses to Questions Posed in the Commission's Proposing Release
Question Group 1
Should we amend the definition of "officer" in Rule 3b-2 to include specific references to additional individuals and entities who may perform "corresponding functions"?
Section 303 of the Act mandates a prohibition for "officers or directors of an issuer, or any other person acting under the direction thereof" to influence, coerce, manipulate, or mislead an auditor engaged in the performance of an audit or review of the financial statements of that issuer. The AICPA strongly recommends that the Commission embrace a broader view of the scope of this prohibition. The purpose of Section 303 is to address "fraud and misconduct in the audit process."3 Consistent with this objective, the application of this provision should not be limited to officers or directors or persons acting under their direction. Rather, the prohibition should extend to the many other persons whose actions or omissions may impact the audit process (e.g., corporate employees acting unilaterally or third-parties certifying certain information relating to the issuer).
Rather than amend the definition of "officer" to try to identify all of the individuals and entities who may perform "corresponding functions," the Commission should amend the rule to prohibit any person from misleading an auditor engaged in the performance of an audit or review of the financial statements of an issuer.
Should we amend Regulation 13B2 to craft a special definition of a public company officer for the purposes of that regulation?
As indicated above, the rule should apply to any person and, therefore, crafting a new definition of "officer" is unnecessary. In the event that the Commission determines that it is necessary to define the term, the Commission should craft a definition of "officer" for the purposes of the Proposal which is broader than, and separate from, the Rule 3b-2 definition.
If we amend Rule 3b-2 or Regulation 13B-2, who should be included or excluded from the definition of "officer"?
As indicated above, the rule should prohibit any person from misleading an auditor engaged in the performance of an audit or review of an issuer's financial statements, not just officers or directors or persons acting under their direction. Therefore, it is unnecessary to indicate who should be included or excluded from the definition of an "officer."
Question Group 2
Should we define by rule the scope of "any other person acting under the direction" of an officer or director?
It is not necessary to define "any other person acting under the direction" of an officer or director. As indicated above, the AICPA recommends that the rule prohibit any person from misleading an auditor engaged in the performance of an audit, regardless of title or function.
Question Group 3
Should the types of conduct that might constitute actions to fraudulently influence an auditor be set forth in the rule?
No. The types of conduct that might constitute actions to influence or mislead an auditor should not be expressly stated in the rule. It is not possible to come up with every conceivable way an individual might try to improperly influence or lie to an auditor. In addition, if the examples are set forth in the text of the rule - even as non-exclusive examples - some may argue later under the norms of statutory construction that any improper conduct alleged by the Commission should be similar in nature to the listed examples. The AICPA suggests that the Commission list the examples in the adopting release or subsequent interpretive guidance.
If so, which items listed in the preceding paragraph should be included or excluded?
All of the items are appropriate but, as previously indicated, they should not be listed in the text of the rule.
What additional types of conduct, if any, should be included?
The AICPA has no other examples to suggest.
Question Group 4
Should we define by rule the phrase "independent public or certified public accountant"?
In order to be consistent with the provisions of the Act, the AICPA suggests that the Commission replace the phrase "independent public or certified public accountant" with "public accounting firm or persons associated with that firm." Defined as such, this regulation will include or apply to registered public accounting firms as well as other public accounting firms that are engaged in the performance of an audit or review of the financial statements of an issuer that are to be filed with the Commission.
The rules currently in Regulation 13B-2 refer to "accountant" as opposed to "independent public or certified public accountant." Should these rules, or the proposed rules, be changed to refer to the same term? Which term should be used?
The AICPA suggests that the rules should consistently refer to "public accounting firm or persons associated with that firm."
Question Group 5
Should proposed Rule 13b2-2(b)(2) provide a specific definition of "engaged in the performance of an audit"?
The AICPA agrees that the term "engaged in the performance of an audit," as used in Section 303 of the Act, should be given a broad interpretation. Accordingly, the AICPA agrees with the Commission's interpretation that the phrase should encompass the professional engagement period, which begins when the public accounting firm is selected to perform audit or review services and continues until there is a formal or informal public notification that the professional relationship has ended.
Question Group 6
Is subparagraph (b)(2) of the proposed rule helpful or necessary?
The AICPA considers subparagraph (b)(2) to be helpful, but not necessary. The AICPA considers the requirement to be clearly outlined in subparagraph (b)(1).
Should it be deleted?
As indicated above, the AICPA considers subparagraph (b)(2) to be helpful; therefore, the AICPA does not recommend that it be deleted.
If subparagraph (b)(2) should be adopted, are the examples appropriately illustrative?
The AICPA considers the examples to be appropriately illustrative.
Should more, or fewer, examples be included in the rule? If so, what examples should be added or removed?
The AICPA has no proposed additions or deletions.
Question Group 7
The Commission is considering strongly other wording changes to make the rule effective in preventing improper influences. There are several changes, individually or collectively, that could accomplish that objective, and we solicit comment on the best approach. For example:
Should we replace the statement in subparagraphs (b)(1) and (c) that no person acting "under the direction" of an officer or director shall improperly influence the auditors of the issuer's financial statements, with a statement that no person acting "at the behest of" or "on behalf of" an officer or director shall improperly influence the auditors. Such language might better indicate that no specific direction by an officer or director is required to violate the proposed rules.
As indicated above, the AICPA recommends that the rule should be simplified and strengthened to prohibit any person from influencing, coercing, manipulating, or misleading an auditor engaged in the performance of an audit. Therefore, the phrases of "acting under the direction of," "acting on behalf of" and "acting at the behest of" would not be necessary.
Question Group 8
Is it necessary or appropriate 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? If so, which service providers should be covered?
As indicated above, the rule should apply to any person and, therefore, extending the prohibition to an investment company's service providers would be superfluous.