To: File No. S7-49-02
From: Office of Commissioner Glassman
Date: January 16, 2003
RE: Meeting with representatives of KPMG on January 13, 2003 on Proposed Auditor Independence Rules, Title II of the Sarbanes-Oxley Act of 2002 ("Act")

Attendees of Deloitte: Sam Ranzilla, Gregory Russo, Richard Smith, and Stephen Allis

The above listed representatives of KPMG met with Commissioner Cynthia A. Glassman to discuss the Commission's proposed rule on Auditor Independence. Their discussion points were commensurate to their written comments, dated January 9, 2003 and submitted to the Commission. KPMG discussed four main areas of auditor independence: tax services, partner rotation, compensation, and transition period. KPMG expressed cutting back on auditor rotation because of its negative effects on quality, and logistics. They suggested rotating the lead and concurring partners, and partners of significant subsidiaries. The deciding factor of who should be rotated should be where the exposure on an audit will lead to lack of independence. They believe that there is no additional benefit to rotating more partners beyond this deciding factor. They support the reduced rotation schedule to 5 years on an audit with 5 years off of that audit.

KPMG encourages the Commission to stay within the guidelines of the Act with respect to tax services. They believe that the Act clearly allows for audit firms to perform tax services for audit clients, yet the proposed rule would lead to a rejection of all tax services by an auditing firm. KPMG states that if the proposed rules must prohibit some tax services, the rule must draw that line very narrowly.

KPMG believes that the proposed rule cut too deep when it proposed to prohibit compensation to audit partners for sale of nonaudit services to an audit client. They recommend that the prohibition be clearly defined by adding that audit partners should not be "directly" compensated for cross-selling services. Finally, KPMG recommended a orderly transition periods for rotations that would incorporate enough time for close outs and change of vendors.