Computer Sciences Corporation
December 26, 2002
Mr. Jonathan G. Katz, Secretary
Re: File No. S7-46-02
Dear Mr. Katz:
Thank you for the opportunity to comment on the Commission's "Proposed Rule: Retention of Records Relevant to Audits and Reviews," Subject File No. S7-46-02 (the "Proposed Rule").
We believe integrity in financial reporting is absolutely essential to the effective operation of capital markets and efficient functioning of our economy. Effective independent audits of registrants are critical to investor confidence in our financial reporting system, and investor confidence is heavily dependent on the perceived credibility and effectiveness of the audit process. Standards for audit documentation are critical to investor credibility and confidence in the financial reporting system. We wholeheartedly endorse the requirements under the Proposed Rule and believe the proposed record retention standards are largely consistent with practices of major audit firms serving registrants.
We have provided a summary of our more significant comments and suggestions in the following paragraphs and have included detailed responses to each request for comment in the attached Exhibit.
Overall, we think the Proposed Rule is consistent with the requirements of Section 802 of the Sarbanes-Oxley Act of 2002 (the "Act") regarding record retention of documents relating to an audit or review of a registrant. The record retention provisions under the Proposed Rule also appear consistent with audit documentation requirements under Statement of Auditing Standards No. 96, "Audit Documentation" ("SAS No. 96"). We agree with the record retention provisions requiring auditors to retain not only materials that support their conclusions concerning the registrant's financial statements, but also those materials that "cast doubt on the final conclusions reached by the auditor." However, we have suggested alternative language we believe captures the Commission's intended scope of such documents without a pejorative connotation, which could weaken, rather than improve, investor confidence in the integrity and effectiveness of independent audits.
The following comments and suggestions are submitted in response to your specific requests for comment. These suggestions and comments are more fully described in the attached Exhibit.
Thank you for the opportunity to comment on this important proposal and for your consideration of our comments and suggestions.
The Honorable Harvey L. Pitt, Chairman, Securities and Exchange Commission
Proposed Rule: Retention of Records Relevant to Audits and Reviews Subject File No. S7-46-02 (the "Proposed Rule")
Request for Comments
II. Discussion of the Proposed Rule
1. Are the "work papers" and other documents that would be required under this proposed rule sufficiently described?
Yes, incorporation of the precepts of Statement on Auditing Standards No. 96, "Audit Documentation" ("SAS No. 96") in defining documents comprising "work papers" is appropriate and consistent with the intent of the Act. Furthermore, this should facilitate implementation of the Proposed Rule since the precepts of SAS No. 96 are widely understood by the accounting profession, legal profession and registrant community.
2. Would auditors have to implement significant changes to their retention policies or internal control processes and procedures, as well as system upgrades, to ensure compliance with the proposed rule? If so, what types of changes most likely would be required? How can we minimize any required changes consistent with section 802?
Yes, we believe auditors would have to implement significant changes to their retention policies, internal control processes and procedures, and administrative procedures, as well as potential system upgrades to ensure compliance with the Proposed Rule. Auditors will now have to retain a somewhat broader range of documents in addition to the work papers necessary to support their opinion in accordance with generally accepted auditing standards. This somewhat broader range of documents will likely require some level of additional review prior to inclusion and retention in the auditor's permanent records. This is likely to increase the cost of audits to issuers.
3. Would auditors circumvent the proposed record retention requirements by, for example, replacing written communications with oral communications?
4. Section 103 of the Sarbanes-Oxley Act directs the Public Company Accounting Oversight Board to adopt an auditing standard that requires each registered public accounting firm to retain for a period of not less than seven years audit work papers and other information that support the conclusions in the auditor's report. Should the retention period in the proposed rules be extended to seven years to coincide with the retention period in section 103? Why?
No. As noted in our comment above, the broader scope of documents subject to record retention under the Proposed Rule will likely result in additional cost. We think the five-year record retention period under the Proposed Rule clearly meets the requirements and intent of the Act and any foreseeable need for such information. Increasing the record retention period to seven years for documents subject to record retention under Section 802 (which are not already required by Section 103) would further increase this cost burden without any commensurate benefit.
5. Should the retention period be for some other appropriate period based on consideration of other factors, such as utility of the records to investors, regulators or litigants, the cost of retaining the records, or the size of the accounting firm?
No, the five-year record retention period is appropriate and sufficient to accomplish the purposes of the Act.
6. Audits of the financial statements of many investment advisers and broker-dealers would not be subject to the proposed rules because they are not issuers of securities. Should the proposals be amended to apply the retention period to audits of the financial statements of these entities? Why?
7. The proposed rules would incorporate the definition of issuer in new section 10A (f) of the Exchange Act? Should issuer be defined more broadly to include any issuer of securities with respect to which a registration statement or report is filed with the Commission? Why?
Yes, we think the Proposed Rule should apply equally to all companies with publicly traded securities.
8. Should there be a document retention requirement for issuers as well as auditors? If yes, what would be the scope and nature of that requirement? For example, should issuers be required to retain records that the auditor reviewed but did not include in the audit work papers? Should issuers be required to keep copies of all correspondence with the auditors and copies of all documents provided to the auditors?
No. A similar document retention requirement for issuers is neither feasible nor practical. The issuer is not necessarily aware of the specific documents and/or work papers provided to the auditor that were relevant to the audit and formed the basis for the audit opinion. There are hosts of documents, databases, board minutes, memorandums, financial records in varying formats, etc. provided to the auditors on an ongoing basis as well as during the year-end audit. It is nearly impossible for an issuer to determine what, if any, documents provided to the auditor were relevant to the audit and formed the basis for the audit opinion. This is an assessment, which is specifically within the scope of the auditor's procedures relative to the issuance of an opinion on the financial statements of the issuer. Furthermore, it seems duplicative to require both the issuer and the auditor to have similar record retention policies to capture the very same information. The flow of information between the issuer and the auditor is continuous. There are many departments and individuals within the issuer's organization that provide information and documentation to the auditor. It would be extremely onerous and costly to require the issuer to separately track and maintain all documents provided to the auditor. This is particularly true, as the auditor will be required to maintain essentially the same information. We, therefore, believe that any such rule to require similar record retention by issuers would be unnecessary.
9. Section 32 c of the Investment Company Act of 1940 authorizes the Commission to adopt rules to require accountants and auditors to keep reports, work sheets, and other documents and papers relating to registered investment companies for such periods as the Commission may prescribe, and to make these documents and papers available for inspection by the Commission and its staff. Should we use our authority under this section to extend proposed rule 2-06 by requiring that audit work papers and other documents required to be retained with respect to the audit or review of investment company financial statements be made available for inspection by the Commission and its staff?
10. The proposed rules would apply to foreign auditors. Are there statutes, rules or standards in foreign jurisdictions that govern the retention of records by foreign auditors that are different from and potentially conflict with the requirements of the proposed rules? If so, how is the foreign law incompatible with the specific provisions of the proposed rules?
11. 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? Should the scope be narrower or broader? Would a different test be more appropriate, such as significant differences in professional judgment, or difference of opinion on issues that are material to the issuer's financial statements or to the auditor's final conclusions regarding any audit or review?
We think the characterization of such documents as materials that "cast doubt on the final conclusions reached by the auditor" is somewhat pejorative and could weaken investor confidence in the integrity and effectiveness of independent audits. We suggest the Proposed Rule characterize such documents as follows:
Documents subject to retention should include materials which indicate disagreements or inconsistencies with respect to any matters which could have had a material bearing on the registrant's financial statements or the auditors' opinion thereon. These matters may include, but are not limited to, disagreements or inconsistencies relating to the adequacy of the scope of audit procedures, conclusions on the results of such procedures, compliance of the registrant's financial statements with generally accepted accounting principles and the appropriateness of the auditors' opinion on the registrant's financial statements. Such documents should also include materials regarding the resolution of any disagreements and inconsistencies and the basis for the ultimate conclusion regarding these matters.
12. Should the rules include other examples of materials that cast doubt on auditor's conclusions? If so, what examples should be used?
Yes, we think further examples may be helpful (refer also to our response to question 11).
V. Cost Benefit Analysis of the Proposed Rules
13. Are there any other costs or benefits that we have not identified? For example, would the cost of audits increase? Please describe any such costs and provide relevant data?
We believe the Proposed Rule will increase auditors' record keeping requirements, particularly with respect to documents included under the Proposed Rule which customarily have not been part of the "work papers" in the past. Consequently, there will be corresponding increases in audit costs, as the issuers will absorb these additional costs. As a result, we again recommend the Commission retain the five-year record retention period under the Proposed Rule (refer also to our response to question 4).
14. Are there additional costs related to the proposed rules? If there are, please identify them and provide supporting data.
Refer to our response to the preceding question.
15. Are there measures that the Commission should take, such as encouraging accounting firms to keep more records electronically, to lower storage costs?
We think the actual means of implementing these record retention requirements are best determined by the auditors. Competitive fee pressures should be sufficient to ensure that auditors address the requirements under the Proposed Rule in a cost effective manner.
16. We request comments on the reasonableness of the burden hours, cost estimates, and underlying assumptions related to the proposed disclosures?