The Business Roundtable
Mr. Jonathan G. Katz
Re: Release No. 33-8154, Strengthening the Commission's Requirements
Dear Mr. Katz:
The following comments are submitted on behalf of The Business Roundtable, an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees in the United States and $3.7 trillion in annual revenues. The Business Roundtable strongly supported enactment of the Sarbanes-Oxley Act of 2002 (the "S-O Act"), and we support the Securities and Exchange Commission's efforts to implement the S-O Act. We believe the law will go a long way toward establishing new, higher standards for America's corporations. As CEOs, we are committed to maintaining a strong economy, a vibrant workforce, and creating new jobs. We appreciate the opportunity to provide you with our views on the recent Securities and Exchange Commission ("Commission") proposal to implement Sections 201, 202, 203, 204, 206, and 208 of the S-O Act, relating to auditor independence.
Audit, Audit-Related, Tax and Other Fee Disclosures
The Roundtable strongly supports the Commission's proposal to create a new disclosure category, titled Audit-Related Fees, and expand the types of fees that may be reported as Audit Fees in the required proxy disclosures of fees paid to independent auditors. These modifications will greatly increase transparency in auditor fee disclosures, and we encourage the Commission to adopt them substantially as proposed.
We are concerned, however, about another aspect of the Commission's proposal relating to fee disclosures. The proposal would require companies to disclose the percentage of audit-related, tax and other non-audit fees that were pre-approved by the audit committee pursuant to Rule 2-01 of Regulation S-X. As noted below, however, Rule 2-01 relates to audit committee pre-approval of audit and non-audit services, not fees. As a result, it is not clear whether the disclosure requirement would relate to pre-approval of the fees themselves or pre-approval of the services that are expected to generate the fees. In any event, we believe this disclosure would be confusing to investors, and is unnecessary given that audit committees will be required to pre-approve all audit and non-audit services.
Audit Committee Pre-Approval Requirements
Section 202 of the S-O Act provides that an issuer's audit committee must pre-approve all audit and non-audit services to be performed by the issuer's independent auditor. To implement Section 202, the Commission has proposed to include a new requirement in Rule 2-01 of Regulation S-X, providing that an accountant will not be considered independent with respect to an issuer unless the issuer's audit committee pre-approves all audit and non-audit services to be performed by the accountant. The proposing release indicates that the audit committee "may approve broadly the provision of audit, review and attest services by the auditor to the issuer and its subsidiaries." With respect to the auditor's provision of non-audit services, however, the proposing release indicates that the audit committee must either: (1) specifically pre-approve each non-audit service (with a separate vote for each service); or (2) establish "detailed" policies and procedures by which the auditor may be engaged to perform particular non-audit services.
The Roundtable believes that audit committees should have the flexibility to design pre-approval policies and procedures that are appropriate for their companies. We are concerned, however, that the Commission's proposal may require an inappropriate level of detail and unduly limit the discretion permitted an audit committee in developing its pre-approval policies and procedures. For example, we believe that audit committees should be permitted to adopt minimum thresholds below which management has discretion to approve specified non-audit services. Moreover, audit committees should have the flexibility to approve categorical baskets of non-audit services, such as tax services and audit-related services, without voting separately on each engagement. Such policies would permit audit committees to exercise effective oversight over auditor independence, without creating unnecessary "busy work" for audit committees and their members. We encourage the Commission to make it clear that minimum thresholds and categorical baskets would be permissible under the final rules.
The Commission's proposal also would require companies to disclose "in detail" the audit committee's pre-approval policies and procedures for engaging the independent auditor to perform non-audit services. We believe that requiring such detailed disclosure about internal board processes would not be helpful to investors. It should be sufficient for companies to disclose that the audit committee has pre-approved all non-audit services or has established policies and procedures by which the auditor may be engaged to perform non-audit services. No additional benefit would accrue from a requirement that companies describe such policies in great detail. Moreover, including such detailed disclosures in annual reports or proxy statements could confuse investors and even distract them from more important information.
Audit Partner Rotation
The Commission's proposal would require rotation of all accounting firm partners who perform audit, review or attest services for an issuer for five consecutive years. Moreover, the proposal would require that, following rotation, a partner may not resume providing audit services to the issuer during a "time-out" period of five consecutive years. These requirements go beyond Section 203 of the S-O Act, which prescribes rotation requirements for only the lead audit and review partners and contains no "time-out" requirement.
The Roundtable is concerned that the proposed expansion of Section 203 to require rotation and "time-out" periods for all partners who perform audit, review or attest services for an issuer could unduly limit the efficiency, continuity and expertise of audits, particularly for audit clients in specialized industries. Moreover, it would be very difficult for any but the largest audit firms to meet the proposed standards. For example, some smaller firms may not be able to staff the audit engagement team with enough partners who are qualified to address the complex issues faced by audit clients if the proposed rotation requirements are adopted. Removing such firms from the auditor market could greatly restrict the choices available to small and medium-sized issuers and significantly increase the cost of audits. For these reasons, we suggest that the Commission revise its rules to more closely follow Section 203 of the S-O Act. If, however, the Commission decides to adopt rotation requirements covering all partners who perform audit, review or attest services for an issuer, the Commission should provide a phase-in period to allow for audit team continuity and should consider a longer rotation period (such as seven consecutive years) for partners other than the lead or review partner.
Section 201 of the S-O Act provides that auditors may provide "tax services" to audit clients, subject to audit committee pre-approval requirements. We are concerned that the Commission is considering additional limitations on such services, including restrictions on tax opinions and "advocacy," and is proposing that audit committees analyze each proposed tax service against three broad, general principles mandated by the Commission.
Companies must be able to use their auditors to advise them of tax requirements, prepare tax returns, analyze and advise as to the appropriateness of tax accruals, and assist them in responding to governmental tax audit inquiries. These routine, but important, tax services generally can be provided most efficiently by companies' auditors and have not been thought to raise independence issues. As discussed above, audit committees should be permitted to give periodic approval to such routine tax services, by category, rather than having to make an engagement-by-engagement analysis applying the three broad - and vague - principles proposed by the Commission. In this regard, the proposal puts an unreasonable burden on audit committees by asking them to monitor auditor independence without giving them clear rules and guidance as to what is prohibited. This could well result in audit committees spending undue resources trying to discern the intent of the Commission or imposing unnecessary costs on the company by determining that the company should use another service provider for services that can be delivered more efficiently by the auditor, particularly where those services enhance audit quality and do not threaten independence. Therefore, we urge the Commission make the rules as clear as possible and refrain from creating ambiguity in the commentary.
We appreciate your consideration of these comments, and we would be happy to discuss these matters further or to meet with you if it would be helpful.
Henry A. McKinnell, Ph.D.
cc: Hon. Harvey
Hon. Paul Atkins
Hon. Roel Campos
Hon. Cynthia A.
Hon. Harvey Goldschmid
Giovanni P. Prezioso