CALIFORNIA BOARD OF ACCOUNTANCY
2000 EVERGREEN STREET, SUITE 250
SACRAMENTO, CA 95815-3832
TELEPHONE: (916) 263-3680
FACSIMILE: (916) 263-3675
WEB ADDRESS: http://www.dca.ca.gov/cba

December 23, 2002

Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

Re: Proposed Rule: Retention of Records Relevant to Audits and Reviews
No. S7-46-02

Dear Mr. Katz:

The California Board of Accountancy (CBA) commends the SEC for its prompt action in promulgating the proposed rules on retention of records relevant to audits and reviews and is grateful for the opportunity to comment thereon. In general, we support the proposed rules for implementing Section 802 of the Sarbanes-Oxley Act of 2002, and strongly favor the implementation of uniform documentation standards for all audits and reviews.

First, the CBA specifically supports: 1) combining the record retention and documentation requirements of Sections 103 and 802 of the Sarbanes-Oxley Act into a single requirement applicable to the broader category of records covered by Section 802; 2) establishing a uniform seven-year retention period; and 3) applying the documentation and retention requirements not only to audits and reviews of securities issuers but also to audits and reviews of investment advisors and broker-dealers.

Second, the CBA recommends that the Commission adopt the General Accounting Office (GAO) "Yellow Book" standard for the content and form of working papers. California recently enacted legislation mandating the GAO standard for documentation of working papers for all audits, not just audits of publicly traded companies (California Business and Professions Code Section 5097, AB 2873, Attachment A). This standard requires audit documentation to contain sufficient documentation to enable a reviewer with relevant knowledge and experience, having no previous connection with an audit engagement, to understand the nature, timing, extent and results of auditing or other procedures performed and the identity of the person or persons performing the work. The recent exposure draft of SAS 96 included similar language, but was ultimately removed when the final standards were issued in February 2002. We believe that the GAO definition of working papers will result in documentation that is more complete, and we encourage the SEC to embrace similar language in the final rules for Section 802.

The current professional standards are vague concerning the nature and extent of required documentation. In past disciplinary proceedings before the California Board, this vagueness has allowed licensees to argue that certain documentation did not meet the requirement to be included in the written working papers. The development of clear and concise guidelines for working paper documentation and retention is a critical element in restoring consumer confidence in the capital markets. California's new law on working paper documentation and retention (California Business and Professions Code Section 5097, AB 2873, Attachment A) also puts forth a rebuttable presumption that provides if the audit work is not adequately documented in the working paper file, the burden of proof is shifted to the auditor, who then must prove by a preponderance of evidence that the work was in fact done. Under the stricter standard, it should also be noted that working papers could be considered incomplete if oral recollections are necessary to explain or support key audit positions.

Third, the CBA supports a rule that requires auditors to document all "differences of opinion" on issues that are material to the audit. This should include documentation of "differences of opinion" on financial reporting issues in addition to accounting and auditing issues. Requiring the documentation of all "differences of opinion" on material issues will permit the reviewer to follow the thought process the auditors used in resolving the audit issues. This will result in a better understanding of key issues such as possible alternative accounting treatment for material transactions.

Fourth, the CBA recommends that the Commission consider requiring audit firms to adopt and maintain formal written document retention and destruction policies. The new California audit documentation law, California Business and Professions Code Section 5097 (Attachment A), includes this requirement, and the CBA is in the process of adopting implementing regulations (see Proposed Rules 68.2-68.5, Attachment B). The CBA would like to call the Commission's attention to one of the proposed regulations in Attachment B: Section 68.4 on changes to audit documentation after the completion of the audit. The CBA urges the Commission to consider adopting a similar requirement. Undocumented, or underdocumented additions, deletions or changes to working papers after completion of the engagement are a form of working paper destruction because they can destroy or obscure the facts as they existed at the time the audit report was issued.

In addition, the CBA believes that the Commission's proposed documentation rules should expressly require documentation of significant relationship issues regarding the auditor and the audited firm, including matters involving auditor independence and conflicts of interest.

Finally, the CBA recommends the following for consideration: the issuer's principal auditor should ensure that auditors performing audit or review work of financial statements related to the issuer's subsidiaries or affiliates in foreign countries will document all work performed, certify in writing that such documentation is complete and available for inspection, and comply with the requirements of this rule by providing for appropriate retention of all audit or review documentation and related work papers.

Thank you for this opportunity to express our views. Should you have questions or need additional information, please contact Carol Sigmann, Executive Officer, at (916) 263-3980.

Sincerely,

Wendy S. Perez
Board President

Enclosures:

Attachment A Attachment B

c: Members, PCAOB

Senator Liz Figueroa
Assembly Member Lou Correa
Assembly Member Dario Frommer
Aileen Adams, Secretary, State and Consumer Services Agency
Kathleen Hamilton, Director, Department of Consumer Affairs
Tim LeBas, Assistant Commissioner, Department of Corporations
Ted White, Chief, Corporate Governance, CalPERS
Janice Hester-Amey, Chief, Corporate Governance, CalSTRS
Members, California Board of Accountancy

Attachment A

Attachment B

CALIFORNIA BOARD OF ACCOUNTANCY
PROPOSED RULES - SECTIONS 68.2 - 68.5

68.2. Components of Audit Documentation.

(a) In addition to the requirements specified in Business and Professions Code Section 5097, audit documentation shall include, but not be limited to, the following:

(1) the objectives, scope, and methodology, including any sampling criteria used;

(2) documentation of the work performed to support significant conclusions and judgments, including descriptions of transactions and records examined that would enable a reviewer with relevant knowledge and experience, having no previous connection with the audit engagement, to examine the same transactions and records; and

(3) evidence of any supervisory reviews of the work performed.

(b) To provide for the identification of audit documentation, audit documentation shall include an index or guide to the audit documentation which identifies the components of the audit documentation. Audit documentation shall provide the date the document or working paper was completed by the preparer(s) and any reviewer(s), and shall include the identity of the preparer(s) and any reviewer(s).

Note: Authority cited: Section 5010, 5018, and 5098, Business and Professions Code. Reference: Sections 5097 and 5098, Business and Professions Code.

68.3. Retention Period for Audit Documentation.

(a) The retention period mandated by Business and Professions Code Section 5097 shall be measured from the report date.

(b) If audit documentation is required to be kept for longer than seven years because of a pending Board investigation or disciplinary action, audit documentation shall not be destroyed until the licensee has been notified in writing by the Board of the closure of a Board investigation or disciplinary proceeding.

(c) Any documents required to be maintained by Business and Professions Code Section 5097 or these regulations shall be maintained in accessible form.

Note: Authority cited: Section 5010, 5018, and 5098, Business and Professions Code. Reference: Sections 5097 and 5098, Business and Professions Code.

California Board of Accountancy

Attachment B

Page 2

68.4. Changes in Audit Documentation After Issuance of the Report.

(a) Changes in audit documentation include any addition, removal, deletion, substitution, or editing of audit documentation, including, but not limited to, physical or electronic additions to any audit documentation file or preexisting audit documentation, occurring after the date of issuance of the audit report which is supported in whole or in part by the audit documentation.

(b) Audit documentation shall include both the report date and the date of issuance of the report.

(c) In addition to any other documentation required by professional standards, any changes in audit documentation shall provide the identity of the person(s) making the change, and identity of any person(s) approving the change, the date of the change, and the reason for the change if the reason is other than the assembling of pre-existing documents. The documentation which is changed shall contain sufficient detail to enable a reviewer with relevant knowledge and experience, having no previous connection with the audit engagement, to understand the nature, timing, reason for, and extent of the change.

Note: Authority cited: Section 5010, 5018, and 5098, Business and Professions Code. Reference: Sections 5097 and 5098, Business and Professions Code.

68.5. Audit Documentation Retention and Destruction Policy.

(a) Licensees shall maintain, and document compliance with, a written Audit Documentation Retention and Destruction Policy which provides for the preservation of audit documentation for the full time period required by Business and Professions Code Section 5097. The policy and documentation of compliance shall be available to the Board upon request.

(b) This policy shall provide for the authorized custody, security, access, retention, and destruction of the documentation. This policy shall, at a minimum, include the following:

(1) procedures for the maintenance of back-up copies of electronic audit documentation at secure locations,

(2) procedures for maintaining audit documentation,

(3) procedures for approving any changes to audit documentation,

(4) procedures for approving the destruction of documentation when no longer required to be maintained by Business and Professions Code Section 5097.

(c) The procedure required by subsection (b)(4 ) shall provide for identifying the persons authorized to approve the destruction of audit documentation and shall require that an authorized person verify compliance with subdivisions (d) and (e) of Business and Professions Code Section 5097 at the time of document destruction.

Note: Authority cited: Sections 5010, 5018, and 5098, Business and Professions Code. Reference: Sections 5097 and 5098, Business and Professions Code.