American Institute of Certified Public Accountants
December 27, 2002
Jonathan G. Katz
Re: Comments Regarding SEC File No. S7-46-02
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 retention of records relevant to audits and reviews (the "Proposed Rule"). 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. We stand ready to meet with the Commission and its staff to further clarify any of our recommendations.
We support the proposed rule requiring accounting firms to retain certain records relevant to their audits and reviews of issuer's financial statements. However, we believe that the rule could be clarified and improved in several respects and offer our following comments:
Are the "workpapers" and other documents that would be required to be retained under this proposed rule sufficiently described?
The proposed rule would require that the auditor retain workpapers and other documents that form the basis of the audit or review of an issuer's financial statements, and memoranda, correspondence, communications, other documents, and records (including electronic records) that meet two criteria: (1) materials that are created, sent or received in connection with the audit or review, and (2) contain conclusions, opinions, analyses, or financial data related to the audit or review. We are concerned that these two criteria are highly subjective, and may lead auditors to document less in writing because they would believe that they must retain documentation of tentative conclusions based on incomplete or inaccurate information and opinions, conclusions or analyses of matters that are insignificant to the issuer's financial statements and the auditor's reports.
Audits and reviews of an issuer's financial information are iterative and interactive processes involving all members of the engagement team (including concurring partner reviewers and firm experts with whom advice may be required under firm policy) and numerous client personnel. These processes require that engagement team members continually pose and challenge hypotheses. As a result, over the course of an audit or review, auditors will frequently document a variety of issues in writing because (1) technical issues generally are more well developed and thoughtfully analyzed when they are articulated in writing, and (2) written documentation of the work performed and conclusions reached facilitates more effective and efficient reviews by supervisory personnel.
We believe a broad interpretation of "other documents" would inhibit this interaction among audit firm personnel, because, auditors would be reluctant to place preliminary conclusions, opinions, or analyses in writing, thus creating documents that they would be required to retain. We believe this would not be in the public's interest because this would adversely affect audit quality and the development of lower-level audit personnel. In addition, a tendency to communicate less in written form may result in less complete communications and greater potential for misunderstanding of facts. It also may negatively impact the effectiveness and efficiency of reviews by supervisory personnel, concurring partner reviewers, and firm experts with whom consultation is sought. For example, junior auditors frequently draft preliminary positions on complex accounting transactions. These preliminary memorandums serve an important iterative and interactive process that enhances the audit's quality and effectiveness. However, we do not believe that these memorandums should be retained since a junior auditor's research may not be complete or he or she may not have all the facts and circumstances. What should be retained is a final document that articulates the situation and the auditor's final position.
Therefore, we recommend the definition of "other documents" be more clearly described as "documentation of significant differences in professional judgment arising during the engagement on issues that are material to the issuer's financial statements or to the auditor's final conclusions regarding the audit or review." We recommend this documentation be included in the audit workpapers and the definition of documentation to be retained pursuant to Sections 103 and 802 of Sarbanes-Oxley be made consistent in the final rules.
Does the "cast doubt on the final conclusions reached by the auditor" provision in the proposed rules adequately capture the scope of the retention requirements under the Sarbanes-Oxley Act?
The proposed rule would require that records be retained whether the conclusions, opinions, analyses, or financial data in the records would support or cast doubt on the final conclusions reached by the auditor. We recognize that this proposed rule is intended to ensure the preservation of those records that reflect differing professional judgments and views on matters of significance (both within the accounting firm and between the firm and the issuer) and how those differences were resolved. However, the term cast doubt is too broad of a term, is not currently a term used in professional standards, and, as a result, would not be well understood.
We agree with the comment in Part II of the proposed rule, which states, "materials created under SAS No. 22 and SAS No. 96, as well as other materials that might cast doubt on the conclusions reflected in the auditor's report, would be consistent with the letter and spirit of the Sarbanes-Oxley Act." We believe the concept of retaining documents that "cast doubt" on the auditor's final conclusions is inferred in these two standards, specifically in the provision in SAS No. 22 for auditors to document their "differences of opinion" and the requirement in SAS No. 96 to document significant audit findings. However, we do believe that further clarification is in order to ensure more uniform behavior by auditors in complying with the spirit of this provision of the proposed rule. Accordingly, we recommend that the Commission consider clearly articulating the nature of documentation anticipated relative to consultation on significant matters and the resolution of disputes (both among engagement team members and with the issuer).
As a result, we recommend this provision be stated as follows:
Documentation described in the proposed rules would be retained when (1) the conclusions, opinions, analyses, or financial data in the records support the final conclusions reached by the auditor, or (2) it documents significant differences of professional judgment arising during the engagement and the related issues are material to the issuer's financial statements or to the auditor's final conclusions regarding the audit or review.
Should the retention period in the proposed rules be extended to seven years to coincide with the retention period in section 103?
The period for retention of these materials is five years after the end of the fiscal period in which an accountant audits or reviews an issuer's financial statements, which is the period prescribed by section 802. Section 103 of the Sarbanes-Oxley Act directs the Public Company Accounting Oversight Board ("the Board") to require auditors to retain for seven years audit workpapers and other materials that support the auditor's conclusions in any audit report. As noted in the discussion of the proposed rule, there may be fewer documents retained pursuant to section 103, which focuses more on workpapers that support the auditor's conclusions, than under section 802, which includes not only workpapers but also other documents that meet the specified criteria. The vast majority of documents, however, generally will be covered by both retention requirements.
A document retention policy that prescribes a different retention period for workpapers than for other documents may be difficult to implement Notwithstanding our recommendation for more specificity with respect to the definition of "other documents," we believe a five-year retention policy for "other documents" sufficiently protects the public's interests and, accordingly, we do not recommend extending this requirement to seven years.
Should there be a document retention requirement for issuers as well as auditors?
We are not in a position to comment on the costs and benefits associated with requiring issuers to retain documents; however we believe it would be onerous to require issuers to retain all records that the auditor reviewed but did not include in the audit workpapers, or copies of all correspondence with the auditors and copies of documents provided to the auditors.
We are concerned that imposing such a policy on issuers might inhibit the free flow of information and communication between the issuer and auditor.
The proposed rule may conflict with foreign laws
The standards for retention of audit workpapers and other documents vary from country to country, depending on each country's statutory, regulatory, professional and common business requirements. We believe that further consideration must be given to the ramifications of the final rule on compliance in foreign jurisdictions.
Thank you for the opportunity to comment on this proposed rule.