Mellon Financial Corporation

January 10, 2003

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

Re: Release Nos. 33-8154; 34-46934; 35-27610; IC-25838; IA-2088; FR-64 (the "Release")
File No. S7-49-02

Dear Mr. Katz:

We are writing to comment briefly on the portion of the Release that relates to audit partner rotation. We believe the rule proposal goes well beyond the language and intent of the Sarbanes-Oxley Act of 2002 (the "Act") and will be very burdensome to most issuers.


We suggest that the proposal be modified in the following respects:

  • As set forth explicitly in Section 203 of the Act and its legislative history, the requirement for audit partner rotation should be limited to the lead partner and the review partner.

  • As clearly set forth in the legislative history of the Act, the lead partner and the review partner should be permitted to perform those roles for an audit client for five consecutive years and not have that period shortened because of prior service to the audit client in a different role.


The Release proposes to amend Section 210.2-01 of Regulation S-X to add a new subsection (6) dealing with partner rotation. As proposed, new subsection 6(i) would provide that an accountant is not independent of an audit client if any audit engagement team partner has performed audit services for that client as a partner in each of the five previous years and continues to serve as a partner on the audit engagement team. The Release states with respect to partner rotation that the "Commission is proposing rules to clarify the five-year rotation requirement" specified in the Act. Rather than a clarification, it appears that the proposal represents a significant expansion of those requirements.

We agree that lead partner and review partner rotation is appropriate because of the critical role they play and because the written concurrence of those persons is required before an audit opinion can be issued. That authority in particular individuals should be time-limited. Expansion of the requirement to cover all line partners directly involved in the performance of the audit is not supported by any language in the Act or the legislative history. For larger companies with more complex accounting issues that require higher senior person staffing levels, this will cause a loss of valuable continuity as more and more people are required to rotate off the engagement regardless of the number of hours they have billed to the audit client and regardless of their level of responsibility for the audit. The cost to issuers of new senior level personnel "getting up to speed" with respect to it and the issues it faces will be significant. Nothing in the Act or its legislative history either mandates this extension of the audit partner rotation concept or even suggests that it is appropriate. A rotation requirement for the lead partner and review partner is sufficient to assure objectivity because these are the persons who have overall supervisory authority for the audit.

The interrelationship of the proposal to expand the number of audit partners who are subject to a five-year rotation requirement and the proposal that the five years of permitted service include any year in which any audit services are provided by a partner will be particularly burdensome to issuers. Read literally, if a partner were a line partner on an audit engagement for four years and then were promoted to lead partner, he or she could only serve as lead partner for one year. The aggregation of years of service as a line and lead partner and the expansion of the rotation requirement to line partners could easily force the rotation of all partners on an engagement in the first year the new rule is applicable. From the issuer's perspective, this result is the functional equivalent of mandatory accounting firm rotation and would be contrary to the comment in the Release that "nothing in this proposal is intended to imply that all partners would need to be rotated at the same time."

Clearly, this is not what the Act intended. The Report of the Committee on Banking, Housing and Urban Affairs of the United States Senate to Accompany S. 2673 is quite clear on this point. In discussing audit partner rotation, it states,

    Accordingly, the bill requires a registered public accounting firm to rotate its lead partner and its review partner on audits so that neither role is performed by the same accountant for the same issuer for more than five consecutive years. (p. 21)

    A registered public accounting firm must rotate its lead partner and review partner on its audits of a public company so that no partner performs an audit on the same issuer as a lead partner or review partner for more than five consecutive years. (p. 51) (Emphasis added)

Clearly, there was no Congressional intent to aggregate years of service as a lead or review partner with years of service in any other capacity. We recommend that this non-aggregation concept be reflected in any final rule or, at the very least, in any transitional provisions that are adopted. We also recommend that only lead and review partners be subject to a rotation requirement.

Thank you for your consideration.

Yours truly,

/s/ Carl Krasik

cc: Martin G. McGuinn
Steven G. Elliott
Michael A. Bryson
Michael K. Hughey