Royal Philips Electronics
I refer to your proposed strengthening to the auditor independence rules published for comment on 2nd December, 2002.
I applaud your efforts to strengthen the auditor independence rules. I believe that this will play an important role in restoring investor confidence in the wake of the recent corporate scandals. However, whilst I agree with most of the elements of your proposals, there is one area where I have particular concerns. It relates to the proposed new partner rotation rules.
The partner rotation rules as legislated for in the Sarbanes-Oxley Act (i.e. that the lead and independent reviewing partners should be rotated every five years) seemed to be an appropriate strengthening in this area. However, I have concerns about the implications of your proposed ruling which significantly extends the scope of those partners that need to rotate (ie extending to all partners with an ongoing role in the audit -including specialist partners - and to partners on significant subsidiaries).
I am concerned about the effect of these proposals on the quality of audit opinions generally but particularly for complex groups like ours with distant and specialist subsidiaries.
In distant territories an audit firm may have a limited supply of US GAAS/GAAP skills. Similarly, for specialist businesses there will not necessarily be a ready succession of partners with the relevant skills to perform the work.
The rotation proposals as drafted are, in my opinion, likely to result in all partners having to become generalists - I think that this will be a retrograde step for businesses and audit firms alike.
The proposals further will have potential implications for transition in cases where all partners with experience of a client are required to rotate at once with consequence for depth of knowledge and quality of input from the audit.
I would therefore ask that you reconsider whether it is necessary to implement partner rotation proposals that go beyond those legislated for by the Sarbanes-Oxley Act.