ROBINSON, HUGHES & CHRISTOPHER, PSC
Certified Public Accountants
P. O. Box 880
Danville, KY 40423-0880
January 11, 2003
Mr. Jonathan G. Katz, Secretary
U. S. Securities and Exchange Commission
450 Fifth Street
Washington, DC 20549-0609
Dear Mr. Katz:
I am responding to the proposed rule regarding "Strengthening the Commission's Requirements Regarding Auditor Independence." The reference is File No. S7-49-02.
By way of introduction, I am a practicing CPA from a local firm in central Kentucky. Being from a small firm, I do not represent any "issuers." Rather my interest in the proposed rule arises because my firm provides audit services to banks and 12 CFR 363.3 which applies to financial institutions with over $500 million in assets requires the auditors of such institutions to abide by the independence requirements of the SEC. Perhaps you might suggest my response should be directed to the FDIC rather than the SEC. Nevertheless, I thought it appropriate to express my opinion on the proposed rules from the perspective of a local practitioner.
I am particularly interested in the partner rotation issue since, if the proposed rule is adopted, my firm will have difficulty complying with it and we may be forced to resign from some clients if it is implemented as proposed.
First, let me say that, as you point out in the proposal, the Commission has gone beyond the requirements of the Sarbanes-Oxley Act since the Act only requires that the lead partner not have performed audit services for the issuer in each of the five previous years. As the Act is written, there would only have to be a one-year cooling off period to comply. It therefore seems that the Commission has moved from implementing the law to making new laws and that, I believe, is reserved for Congress.
A five year cooling off period would impose undue hardship on my firm and many more like it and, as stated above, may place us in the unfortunate position of not being able to provide services to some of our clients, thus resulting in the necessity to reduce our workforce (fire people!). I do not believe it was the intent of the legislation to impose such undue hardships on small auditing firms, and I encourage you to consider some relief. Perhaps, as you suggest in the questions you pose, there could be an exemption for small firms. My suggestion would be to exempt firms with less than 100 professional staff from the requirement. Such an exemption would cover most local firms like my own and still permit clients to obtain services from a qualified local firm.
I would also like to address the "forensic auditors" concept, which you propose as a possible solution to the staffing dilemma. It seems to me that it is unnecessary to add another layer of red tape when the other provisions of the Act, including changes to the peer review process, should be able to accomplish the same purpose.
And finally, I would like to address another issue that I did not see discussed in the proposed rule, as it is one that I feel needs clarification. My question is when does the partner rotation rule first apply. Suppose a client was formerly a privately held entity, but subsequently went public. Does the five year prior service limitation include the time that the partner served the client before it became an issuer or does it begin when the client becomes an issuer?
Thank you for the opportunity to respond. I look forward to the results.
Larry T. Clark
Larry T. Clark, CPA