The Vanguard Group
January 13, 2003
Jonathan G. Katz, Secretary
RE: Strengthening the Commission's Requirements Regarding Auditor Independence, File No. S7-49-02
Dear Mr. Katz:
The Vanguard Group1 appreciates the opportunity to comment on the recent proposal by the Securities and Exchange Commission to strengthen auditor independence requirements.2 We strongly support the comments submitted by the Investment Company Institute in its letter to the Commission dated January 13, 2003. We are writing separately to highlight two points that we believe are critical to maintaining an efficient and effective audit process for investment companies. We urge
Audit Partner "Time-Out" Period Should Be Two Years, Not Five Years
We strongly believe that the Commission's proposal to prohibit audit partners from returning to an audit engagement for five years should be reduced to two years.4 A five-year "time-out" period would disrupt the efficient and effective audit of investment companies because of the relatively small number of audit partners with the specialized knowledge and experience needed to audit large investment company complexes. This problem would be particularly acute for complexes located outside of major financial centers. Furthermore, the five-year time-out proposal goes beyond the scope and intent of Section 203 of the Sarbanes-Oxley Act (the "Act"), which merely prohibits audit partners from serving an issuer for more than five consecutive years and does not mandate any "time-out" period. The lack of auditing problems in the investment company industry demonstrates that the current two-year "time-out" period, as established by the AICPA, appropriately balances the need for an effective and economical audit process with the need for "fresh eyes" to audit financial statements.
Auditors Should Report Once Per Year To Audit Committees In A Fund Family
We recommend that the Commission ease the unnecessary expense and administrative burden that would be placed on investment company complexes by requiring auditors to report on a fund's accounting policies to a fund's audit committee "prior to the filing" of each required audit report with the Commission. Investment companies in a large complex typically have common boards and staggered fiscal year ends in order to control costs and maintain efficient workflows throughout the year. Vanguard's 112 funds, for example, have one common audit committee and fiscal year-ends spread out over six months. If the rule were adopted as proposed, the funds' auditor would have to prepare multiple versions of substantially similar reports six times per year for the audit committee to examine before each annual audit filing with the Commission. The administrative burden and cost this would impose would not be balanced by a commensurate benefit.
The primary purpose of requiring the auditor to report to the audit committee is to communicate "critical accounting policies and practices used by the issuer" as well as alternative accounting treatments. 5 Funds' critical accounting policies and alternative accounting treatments are largely the same throughout an investment company complex and do not change frequently. Consequently, frequent reports from the auditor to the audit committee would likely be identical or substantially similar from month to month. Requiring an audit committee to review substantially similar documents multiple times per year would eliminate many of the organizational efficiencies of the mutual fund family structure. The proposed approach would not be an efficient use of an audit committee's time and, more significantly, provides no benefit to the funds or their shareholders.
We propose that the Commission require auditors to make audit committee reports once during a 12-month period, except in cases where a material accounting issue arises. An annual report from the auditor would ensure that the audit committee is apprised of critical accounting issues and alternative treatments of financial information, but is not subject to the burden and expense of unnecessary reports and meetings.
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We appreciate the opportunity to comment. If you would like to discuss these comments further, or if you have any questions, please contact me at (610) 503-4016, or Christopher A. Wightman, Associate Counsel, at (610) 503-2320.
cc: Paul F. Roye, Director
John J. Brennan, Chairman and CEO