State of Wisconsin Investment Board
January 13, 2003
Jonathan G. Katz, Esq.
Re: File No. S7-49-02
Dear Mr. Katz:
The State of Wisconsin Investment Board ("SWIB") appreciates the opportunity to comment on Release No. 33-8154 (the "Release") published by the Securities and Exchange Commission (the "Commission") regarding the proposed amendments to the Commission's auditor independence requirements. SWIB manages the tenth largest public pension fund in the U.S. and currently invests more than $58 billion of retirement funds and government assets. SWIB strongly supports the proposals, because for many years we have advocated for enhanced auditor independence requirements. Although SWIB believes that accountants should be prohibited from providing any non-audit services to audit clients, we support the proposals because they will implement an important objective of Sarbanes-Oxley - restoring auditors to the role of professionals who ensure the integrity of financial statements. In particular, we believe the proposed amendments will strengthen auditor independence, enhance audit committee oversight of accounting engagements and improve disclosure regarding auditor compensation and audit committee approval policies. However, we believe that the Commission should consider certain modifications, as discussed below.
As a large institutional investor, SWIB depends on auditors to ensure the reliability and integrity of a company's financial statements. We believe that the quality of financial disclosures has been impaired in recent years as the accounting industry changed its focus from providing professional audit services to generating lucrative fees from information technology and other consulting work. In 2000, SWIB urged the Commission to adopt a bright line rule prohibiting auditors from providing any non-audit service to their current audit clients. Rather than adopting such a blanket prohibition, the Commission adopted rules that permitted auditors to provide certain categories of non-audit services, including internal audit work and information technology consulting. As evident in the Enron scandal, auditors may be less critical of a company's financial statements when the auditing firm receives most of its fees from providing consulting and other non-audit services to the audit client. SWIB has served as lead plaintiff in several cases that have challenged auditor independence because of consulting arrangements, and we have seen numerous other situations where auditing services may have been impaired because the auditors were also providing consulting services to the company.
Summary of Proposals
Section 208(a) of the Sarbanes-Oxley Act of 2002 directs the Commission to propose rules relating to, among other things, the provision of non-audit services by a company's outside auditor, auditor conflicts of interests and the rotation of audit partners. Consistent with this directive, the Release includes the following proposals:
Analysis of Proposals
SWIB supports the proposals because they represent a significant improvement over current requirements. We believe the proposals will enhance the independence of auditors, strengthen the role of the audit committee in the financial reporting process and improve disclosure. Although SWIB generally supports the proposals, we believe that the following modifications are needed:
SWIB supports the proposed rules, because they should help restore auditors to their historical role of providing professional audit services and ensuring the integrity of financial statements. However, we believe that auditor independence and investor confidence may still be impaired as long as auditors can sell non-audit services to clients and audit firm professional employees are allowed to move directly into jobs with their audit clients.
I note that the Conference Board Commission on Public Trust and Private Enterprise headed by Treasury Secretary nominee John W. Snow recently issued "best practice" recommendations that (a) tax shelter advice not be provided by auditors because of the apparent conflict when the auditors end up reviewing their own work and (b) audit firms rethink their business models and practices to ensure that providing quality audits is their number one priority. The Conference Board Commission also concluded that audit firm employee movement to an audit client is one of the key factors to be taken into consideration in determining whether a company should change audit firms on a periodic basis. We believe these findings support the recommendations contained in this letter and respectfully ask the Securities and Exchange Commission to make the modifications we have suggested.
We hope our comments will assist the Commission as it considers the proposals. If we can be of further assistance, please do not hesitate to contact me.