GRASSI & CO., CPAs, P.C.
January 13, 2003
Mr. Jonathan G. Katz, Secretary
Re: File No. S7-49-02
In Re: Proposed Rules on Strengthening the Commission's Requirements Regarding Auditor Independence
By Email: firstname.lastname@example.org
Dear Mr. Secretary:
Grassi & Co., CPAs, P.C. is a regional CPA firm with its main offices located in Lake Success, New York and New York City. Our clients include both Securities and Exchange registrants as well as privately held entities.
As proud members of a profession that prides itself on high ethical standards and the highest integrity, we laud the passage of the Sarbanes-Oxley Act (the "Act") and the SEC's efforts to maintain the spirit of the Act in its proposed rules. We appreciate the opportunity to express our views.
While we support the Act, we are, however, of the belief that it is inherently impossible to adapt the auditor independence rules of the Act, and by extension the proposed SEC rules, to small and midsize CPA firms on an "as is" basis. Doing so poses unique and significant problems for smaller CPA firms and their invariably smaller registrants - at best, placing disproportionate demands with a myriad of impacts; at worst, many CPA firms will not even be able to survive.
We cannot ignore, nor do we think Congress, the SEC and the profession should ignore, that taken from a historical perspective, the Act's propulsion to the forefront has in reality been the result of issues relating to entities of very large size, both at the CPA firm level as well as the registrant level. Therefore, the firms that had the least to do with the current climate of issues relating to auditors are the very ones which will carry the largest burden relating to the resolution of these issues!
We acknowledge that there are potential abuses at smaller firms and that controls are necessary to control those potential abuses. With their strong commitment to high quality, we do however maintain that a smaller firm is less prone to abuses, and that from a practical standpoint it is much more likely that even one liability issue could put these smaller firms out of business.
We respectfully correlate our belief to the following areas of the Act and proposed rules:
Nowhere is the disproportionate nature of the Act and the proposed rules more evident than in the area of partner rotation. We agree that partner rotation continues to be a necessity; however, we feel the proposed rule requiring rotation of the lead and review partners after five consecutive years with a five-year cooling off period is unnecessarily burdensome and unnecessary, particularly for smaller firms. Smaller firms simply do not have the bandwidth and quantity of partners to enable such a rotation without severe impacts on the firm's financial condition and its audit and client service quality. In the area of audit quality particularly, in an ironic twist, the result will be the lessening not the enhancement of audit quality, as partners without the proper experience with the client, applicable regulations, and the industry may necessarily be rotated onto a client as the lead audit partner. In turn, the client will suffer, perhaps not receiving the proper service and/or most likely having to bear the additional cost as their new audit partner(s) get up to speed on the company's business operations and unique accounting and financial reporting matters.
Further, we believe the lead and review partners are the only partners the rotation need apply to, and in any event, that the rules relating to the lead partner should be different, ie, more stringent, than those for the review partner as the lead partner invariably has the client relationship.
Therefore, we propose that the SEC delay partner rotation requirements for small to midsize firms for three to five years so that perhaps Congress can readdress the Act as it relates to small and midsize firms. If this is not a possibility, we recommend at a minimum that the SEC proposed rules for small and midsize firms do not go beyond those mandated by the Act - a five year consecutive limit for the lead and review partners with a one-year cooling off period.
We ask you to also take into consideration in your decision the concern voiced by the AICPA on the "cascade effect" any legislation has on nonpublic entities through future Federal and state legislative action.
In keeping with our premise that smaller and midsize firms and their registrants need a different set of rules, we believe there are nonaudit services that, from a cost-benefit standpoint, should be allowed for auditors of small and midsize companies. We wholeheartedly agree with the SEC and AICPA position that an auditor should never be put in a management type role for its audit client. We do, however, note many instances where an auditor might perform a necessary and valued service for the client while still maintaining his or her independence both in appearance and in fact.
These instances include, among others:
In closing, as a template for sweeping accounting and audit reform, the SEC must "get it right" in ensuring that the final rules make sense and are reasonable for entities of all sizes by taking into account the inherent differences in firms and registrants, and by arriving at rules that make sense for everyone and not falling victim to a "one size fits all" approach which, for smaller companies, may very well ultimately have the exact opposite effect from that which was intended.