Confederation of British Industry
13 January 2003
Jonathan Katz Esq.
SEC consultation on Strengthening the Commission's Requirements regarding Auditor Independence
The CBI is the leading UK business association for UK and other countries carrying on business here. Most UK companies with listings in the United States are members of the CBI.
We have noted in previous letters of comment to you, in particular our letters of 16 August 2002 regarding certification requirements under Section 302 and of 29 November 2002 regarding rules under Sections 404, 406 and 407, that the implementation of the Sarbanes-Oxley Act, as it affects foreign companies, should be as pragmatic as possible. In particular, implementing rules should have regard to the frequent existence of comparable, if not identical, rules affecting foreign companies and their auditors in the company's home state, and be recognised as sufficient compliance for the purpose of SEC rules (and those of other regulatory bodies in the US).
Likewise in connection with the proposed rules regarding auditor independence, we consider that the SEC should have regard to home state rules in respect of foreign companies and their auditors. We are concerned in particular with the proposed rules on audit partner rotation.
In the UK, the rules on audit partner rotation have also recently been reviewed, and companies support audit partner rotation at seven-year intervals, and not five years as proposed by the SEC. Under the revised rules being implemented by the Institute of Chartered Accountants in England and Wales, an audit partner can be involved in a central critical role on an audit for seven years, but only be a signing partner for five years.
This distinction is sensible as it enables an audit partner to join the core team for two years before taking on signing responsibility, enabling him / her to understand a complex global group of companies before the five year period starts.
The UK rules relate to those key audit partners that are in a position to influence the group opinion. This covers all those partners where there can be a significant threat from familiarity, but does not require rotation of other partners where alternative safeguards are applied, such as an independent partner review of the planning and key issues.
Your proposals would mean that many other partners in an engagement team would be required to rotate every five years. This extension to cover partners in remote subsidiaries and technical consultation partners is unnecessary in terms of the independence threat posed. It may often also be impractical in locations where the audit client is in a specialised industry and where the audit firm has a relatively small office.
We request that the SEC rules when promulgated allow UK companies and their auditors to operate in accordance with the rules applicable to them in the UK and in line with the EU Recommendations on the issue. These rules are expected to achieve a good balance between understanding the business, accumulated knowledge and 'fresh eyes'.
We note that the SEC proposes to give some recognition to foreign rules on membership of audit committees and regarding appointment of auditors, and we trust that the SEC can provide similar recognition of UK and foreign country rules on audit partner rotation.
If you do not accept that home state rules should apply, at any rate in respect of the UK, it is essential that the transition provisions enable an orderly change of responsibilities accompanying any change in auditor rules. In the case of a complex international group where the central audit partners have served for five or more years, the loss of continuity resulting from the removal of all the core central team would be very damaging to the effectiveness and usefulness of the audit process. This would not be an outcome that the SEC would welcome. It would also have significant cost implications.
We recommend that a two-year transition period should be set to allow for a transfer of knowledge and an orderly change of partner.
In respect of audit and non-audit fees, we see no benefit in requiring disclosure of the percentage of fees pre-approved, since the proposal seems to require that all but immaterial fees must be so approved.