Compass Bancshares, Inc.
VIA E-MAIL to firstname.lastname@example.org
January 13, 2003
Securities and Exchange Commission
Re: Proposed Amendments concerning Strengthening the Commission's Requirements Regarding Auditor Independence.
Dear Mr. Katz:
Compass Bancshares, Inc. ("Compass") appreciates the opportunity to comment on the proposed amendments issued by the Securities and Exchange Commission under Section 208(a) of the Sarbanes-Oxley Act (the "Act").
Compass is a financial services company that was organized in 1970 and operates approximately 344 full-service banking offices in Alabama, Arizona, Colorado, Florida, Nebraska, New Mexico and Texas. Compass has $23.7 billion in assets and is among the top forty (40) bank holding companies in the United States in terms of assets.
The Proposed Amendments are designed to enhance existing independence requirements on accounting firms performing audits of reporting company financial statements. The Proposed Amendments would supplement existing rules on auditor independence contained in Regulation S-X. Specifically the Proposed Amendments would, among other things, prohibit an auditor from providing certain non-audit services including bookkeeping services, financial information systems design and implementation, appraisal or valuation services, actuarial services, internal audit outsourcing, management functions, human resource functions, legal services, expert services, as well as certain types of tax services where those tax services are deemed to be formulating tax shelters for the audit client.
Compass strongly supports the goals of the Act and the Commission's efforts to provide investors with financial statements that are complete and accurate. To this end, we support the Proposed Amendments as ensuring that auditors are able to make independent determinations concerning an issuer's financial statements. However, while we support the objectives of the Proposed Amendments, in our view, the Proposed Amendments raise a number of issues. We have not addressed each request for comment in the Proposed Amendments, but rather only those issues with which we have concerns or for which we have suggestions for improvement.
The Scope of Permitted Tax Services Should be Clarified.
Section 201(b) of the Act provides that "tax services" may be provided by an auditor without compromising the auditor's independence. However, the Commission states that classifying a service as a tax service does not mean that the service is permissible. The Commission argues that the provision of certain services may compromise auditor independence. In discussing what types of non-audit services may be provided by auditors, the Commission set forth 3 broad principles for an auditor (and an audit committee) to consider when assessing an auditor's independence: (1) the auditor cannot audit his or her own work, (2) the auditor cannot function as a part of management, and (3) the auditor cannot serve in an advocacy role for the client. The Commission then provides, as one example of a prohibited service, "an accountant formulating tax strategies (i.e. tax shelters) designed to minimize a company's tax obligations" (the accountant may have to audit her own work). We believe that an issuer's auditors can advise the issuer on tax planning without compromising the auditor's independence.
There is a very fine line between effective tax planning and the use of questionable strategies solely for tax reduction purposes. While we applaud the Commission for seeking to prohibit the use of auditors in designing "tax shelters", we feel an issuer should be free to consult with its auditors and request assistance from the auditor's accounting firm in structuring the issuer's business affairs in a manner that will optimize its tax liabilities. We are concerned that the Proposed Amendments will prohibit this type of interaction between an issuer and its auditors. We believe the Commission should make a distinction between the members of the audit team reviewing their own work and the members of the audit team reviewing the work of a member of a different department of the same accounting firm. Moreover we would submit that simply because an activity may require an accountant to audit the work of another member of her accounting firm, should not automatically mean that the auditor's independence has been compromised or that the auditor's service in this regard should be prohibited.
It would be wrong to assume that, given all of the recent attention to strengthening auditor independence, that an auditing team would give special consideration to any tax planning or tax opinion proffered by another division within the same accounting firm. On the contrary we believe with all of the heightened awareness surrounding auditors that the audit team would subject the analysis to a more rigorous review than if the advice had been submitted by another accounting firm.
Each time an accounting firm certifies an issuer's financial statements the accounting firm assumes the risk of malpractice. When the same accounting firm provides tax planning services which are used in computing the issuer's financial statements (specifically tax liability and net income) the accounting firm has doubled its risk exposure - first in providing the tax analysis and then again in auditing the event or plan related to the analysis.
Prohibiting the auditor's accounting firm from proving tax-planning advice will force issuers to hire outside accountants unfamiliar with the issuer's business to provide such advice. The use a second accounting firm to provide tax -optimization advice will greatly increase costs to the issuer and potentially reduce the accuracy of the issuer's financial statements. Auditors would have access to members of the same accounting firm to obtain an explanation of its tax analysis. This would not be true if an outside accountant is used to prepare the tax analysis. The outside accountants that provided the tax advice will not want to share its expertise with the auditors because they are competitors and will most likely feel its tax advice is a proprietary product of its accounting firm.
The Commission's concern over the auditor's independence should be further mitigated by the Act's requirement that the issuer's Audit Committee (a committee of independent directors charged with retaining the auditors) must pre-approve all non-audit services. With respect to tax planning services the issuer's management, the issuer's audit committee and the auditors would all have to agree that the work requested to be performed constitutes a permissible tax service.
As written, the proposing release would also require a determination of whether a particular tax strategy would constitute a "tax shelter." Such a determination can not made in advance by the auditor or the Commission but rather only after the tax-planning advice has been employed and incorporated into the issuer's tax return for the period. Moreover the Internal Revenue Service is charged with making the determination of what constitutes efficient tax planning and what constitutes impermissible tax shelters. The IRS may not do this until years after the tax strategy has been employed - sometimes by a large number of issuers. The IRS would have to rule that a tax strategy was a tax shelter and that ruling would have to be affirmed by a Tax Court before the auditor and issuer would know conclusively that a tax strategy was impermissible.
Partner Rotation should be limited to the Engagement Partner and Concurring Partner
Section 301 of the Act requires that the lead audit partner and the audit partner responsible for reviewing the audit rotate every five years. By insisting that all partners of an issuer's audit team must rotate every 5 years, the Commission has gone beyond the clear mandate of the Act. We do not believe that extending the rotation requirement beyond the lead or concurring partner serves any real purpose and that any perceived benefits would be more than outweighed by the costs to issuers to constantly educate ever changing groups of auditors about the issuer's business. The Commission is right to be concerned that those partners who are in a position to influence the group audit opinion should be required to rotate every five years. Rotation of the lead partner and concurring partner would seem to address and satisfy this concern.
Auditors should not be prohibited from providing tax opinions.
An auditor's issuance of a tax opinion should not be considered as advocacy on behalf of an issuer. A tax opinion does not advocate a client's position but rather assesses compliance with GAAP much in the same way that a legal opinion assesses compliance with law or regulation. The audit of the issuer's financial statements is analogous to issuing an opinion. Taken to an extreme the Commission's analysis would imply that by issuing clean audit, the auditor is acting as an advocate of the client's financial statements. In reality the auditor is simply assessing the issuer's financial statements for compliance with GAAP.
The fact that the opinion may be provided to a buyer in a potential transaction should not create concern that the auditor will compromise its independence from the issuer. An auditor is not deemed to act as an advocate for the issuer each time an issuer presents its audited financial statements to potential lenders or investors that may rely on that auditor's certification prior to lending to, or investing in securities of, the issuer. Moreover, because an accounting firm puts its malpractice insurance at risk when issuing tax opinions, opinions are not issued lightly. Most accounting firms now have opinion letter committees which review all opinions prior to release and provide an additional layer of independence from the issuer.
We respectfully submit these comments with the hope that they are helpful to the Commission's consideration of the Proposed Amendments. We would be happy to meet with representatives of the Commission to discuss our comments.