New Jersey Society of Certified Public Accountants
Auditing and Accounting Standards Committee
January 14, 2003
Mr. Jonathan Katz
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Re: Strengthening the Commission's Requirements Regarding Auditor Independence (File No. S7-49-02)
Dear Mr. Katz,
The Auditing and Accounting Standards Committee of the New Jersey Society of Certified Public Accountants ("NJSCPA") is pleased to submit its comments on the United States Securities and Exchange Commission's (the "SEC") proposed rule on strengthening auditor independence (the "proposed rule"). The views expressed in this letter represent a unanimous opinion of a quorum of the members of the Committee and are not necessarily indicative of the full membership of the NJSCPA. Our comments either seek clarification in the proposed rule and/or identify areas where the rule could have harmful unintended consequences for which there is not a significant benefit to the investing public. Our comments are in the specific areas of partner rotation, services related to internal controls, tax services and employment of engagement team members as follows:
Partner Rotation - We have two basic comments regarding partner rotation. The first comment relates to all sized accounting firms. The proposed rule regarding partner rotation affects more partners than indicated in section 203 of the Sarbanes-Oxley legislation (the "legislation"). While we believe that rotation of audit partners is fundamental to maintaining auditor independence, the intention of the legislation seemed to affect the rotation of the lead auditor partner and concurring partner every five years. While that in itself has significant effects on any size firm, the proposed rule would require a five-year rotation of other partners involved in auditing material account balances and significant subsidiaries. This not only goes above and beyond the legislation, it causes an undue pressure on the accounting firms who are to serve the best interest of investors without significantly affecting the independence of an audit team. The lead audit partner and concurring partner are the individuals who are responsible for signing off on a set of financial statements including all significant issues. The fact that they are assisted by others, does not change the fact they are responsible for all significant issues. We believe that rotation of only the lead audit partner and the concurring partner every five years is sufficient to accomplish the goals of the legislation. Further, we do not believe that the rotation should be expanded to include managers, as that would only cause further disruption and a reduction of audit quality without significantly increasing independence.
Our second comment on partner rotation relates to smaller sized firms. There have always been exceptions to the SEC's partner rotation requirement for smaller firms. Without having such an exception, certain firms would be unable to serve SEC registrants. As an example, a CPA firm with 10 or fewer audit partners may not be able to effectively maintain the five-year rotation for all partners on all SEC engagements. This has an unintended consequence of having fewer firms available to serve public companies and potentially affecting audit quality and audit fees for smaller SEC registrants. We believe that the proposed rule should be amended to provide an exception for smaller firms based on number of partners along with a market capitalization or revenue size exception.
Services Related to Internal Controls - The proposed rules do not specifically address assisting management in the design and implementation of controls; however, the proposed rules indicate that designing and implementing controls (pending clarification of the meaning of those terms) may be prohibited. Clarification is needed in this area. The requirement to report internal control deficiencies to audit clients has always been a part of any audit. This is evident in communications with management, audit committees and through the issuance of management letters (or even letters for material weaknesses and reportable conditions). As companies move forward with strengthening their internal controls, we believe that it should be clear that their auditors can assist them in this area by making recommendations for internal control improvements without actual designing and implementing the control procedures.
Tax Services - It is clear from the legislation and the proposed rule that tax services are considered unique with respect to non-audit services. The proposed rule clearly states that it is permissible to provide tax services to audit clients as long as the audit committee preapproves those services. There is a need for further clarification in this area. However, we believe that the audit committee should be able to make the determination of whether tax services are appropriate or not.
Employment of Engagement Team Members - Under the proposed rule, employment of audit engagement team members of an accounting firm in a financial reporting oversight role at an audit client within one year prior to the commencement of procedures for the current audit engagement would cause the accounting firm not to be independent with respect to that registrant
We believe that the proposed rule on employment of engagement team members by audit clients is extremely unclear and will be burdensome beyond its intent. We all agree that this will put audit firms in a difficult legal position to restrict the future employment of their employees. Some suggest that this rule be restricted to partners of an accounting firm while others believe it should apply to partners and managers. In addition, the "financial oversight positions" in this proposed rule should be clearly defined and limited as they are in the legislation.
We appreciate you consideration of our comments and will be glad to discuss them with you.
Very truly yours,
Lawrence Gray, CPA
Auditing & Accounting Standards Committee Chairman
New Jersey Society of Certified Public Accountants