January 13, 2003
Jonathan G. Katz
Response letter to the U.S. Securities and Exchange Commission's (SEC) proposed rule regarding auditor independence when providing non-audit services.
Dear Mr. Katz
NiSource Inc. (NiSource) is pleased to submit its comments regarding the SEC's proposed rule amending its existing requirements regarding auditor independence. NiSource is a holding company with headquarters in Merrillville, Indiana, whose operating companies engage in the exploration and production, transmission, storage and distribution of natural gas, as well as the generation, transmission and distribution of electricity. Its operating companies provide service to 3.7 million customers located within the high-demand energy corridor that stretches from the Gulf of Mexico through the Midwest to New England. NiSource participates in regulated business activities and has a strong interest in the proposed rule.
NiSource supports the overall objective of the proposed rule which includes enhancing the independence of accountants that audit and review financial statements and prepare attestation reports filed with the SEC. However, NiSource strongly objects to certain language within Section I.B. of the proposed rule that restricts a public company auditor from acting as an advocate of its audit client "as it would if it provided legal and expert services to an audit client in judicial or regulatory proceedings."
Specifically, NiSource believes that providing factual and expert evidential testimony to a utility regulatory commission regarding its audit client does not present a conflict of interest or an advocacy position. The public accounting firm is not auditing its own work or advocating a particular position but providing a critical non-audit service. As long as the engagement involves the preparation, and possible testimony, of fact-based results, independence is not impaired.
A rate-regulated company needs to engage the most qualified consultant in its presentation of facts to a utility regulatory commission. A witness providing expert testimony in a utility regulatory proceeding that has an objective basis (such as GAAP) is not necessarily acting as an advocate. Evidence that a witness is not acting as an advocate is provided by the fact that the testimony would be identical if it were provided on behalf of the rate-regulated company or any other party involved in the same proceeding. For example, expert testimony that pension expense, included in the cost-of-service component of rates filed by a utility in a rate case, is a current period expense and in accordance with GAAP, would be the same regardless of whether it is given on behalf of the commission staff, an intervener or the utility. This type of expert witness testimony is no different than an auditor acting as a "fact" witness addressing the results of audit work, which is allowed by the proposed rule as currently drafted. If expert witness testimony by an auditor is not prohibited as it relates to the results of audit work, why should it be prohibited with regard to the results of other work provided with an objective basis? In other words, why is testifying on the results of audit work different than testifying on the results of a depreciation or working capital study? Similarly, why is the auditor testifying on the results of an audit considered a fact witness, while the expert witness testifying on the results of a depreciation or working capital study is deemed an advocate?
The expert witness testimony normally provided by public accounting firms in utility regulatory proceedings involves information regarding current and future costs, which the auditor is best able to provide in a knowledgeable, timely, audit-enhancing and cost-efficient manner. Prohibiting an auditor from providing, in certain situations, expert witness testimony on GAAP, effectively provides an opportunity for a company to "opinion shop" in attempting to achieve a desired financial result.
In many situations, a company's auditor would be the most qualified to assist in the preparation of cost-of-service studies or testify regarding the application of a study at the company because of the firm's familiarity with the company and its accounting and operations. It would be unfortunate to promulgate a rule that effectively requires a company to engage a consultant with less background knowledge of the company for fact-based assistance. The end result would be higher costs to the company. These costs would emerge in the form of time invested educating the consultant before they could actively engage in providing testimony and a reduction in efficiencies provided by the audit firm due to the in-depth knowledge of the company, its operations and accounting applications. These costs would presumably be passed on to the ratepayers of the applicable jurisdiction, potentially increasing the rates paid for electricity and natural gas.
NiSource appreciates the opportunity to respond to the proposed rule.